Review the degree of exchange rate fluctuation on import prices under environmental conditions: with emphasis on dietary changes

اقتصاد پولی مالی

Article 9, Volume 26, Issue 18, December 2019, Pages 267-292   

Document Type: پژوهشی

DOI: 10.22067/pm.v26i17.72743

Authors

zohreh eskandaripour; marzieh Esfandiari^*

sistan and baluchestan

Abstract

The main purpose of this paper is to study the degree of exchange rate fluctuation in import prices under environmental uncertainty conditions with an emphasis on dietary changes during the period 1962-1392. Therefore, the EGARCH model and the Markov rotational approach are used. The results of unstable modeling showed that negative and positive shocks are asymmetrically contributing to the formation of uncertainty in the variables of exchange rate, GDP and oil revenues. Based on the results of the Markov rotary model approach, the relationship between import price and its fundamental variables follows a two-mode pattern. Based on the results, the exchange rate, GDP, trade openness and the price of imported goods exported positively and significantly on the price of imported goods. The degree of exchange rate fluctuation in terms of environmental uncertainty in both regimes is more than one unit. The uncertainties of the fixed component increase the rate of exchange rate over the import price, and in addition, the slope of the exchange rate on import prices is also affected by environmental uncertainties. Meanwhile, the role of uncertainty of GDP in increasing the slope of the exchange rate is positive and is very high in relation to the effects of uncertainty in exchange rates and oil revenues.

Keywords

Import prices; exchange rate crossings; macroeconomic uncertainty; Markov rotation regression; EGARCH

References

[1] Abonouri, E., & Erfani, A. (2008). "Markov Rotational Pattern and Predicting the Probability of Liquidity Crisis in OPEC Countries", Journal of Economic Research, No. 3, pp. 30: 153-174. (in Persian)

[2] Al-Abri, A. S., & Goodwin, B. K. (2009). "Re-examining the exchange rate pass-through into import prices using non-linear estimation techniques: Threshold cointegration", International Review of Economics & Finance,18(1), pp. 142-161.

[3] Asgharpour, H., & Mahdillo, A. (2014). "Inflationary Environment and the Impact of Exchange Rate Pass-Through on Import Price in Iran: Markov-Switching Approach". Journal of Economic Research and Policies. No. 70: 75-102. (in Persian)

[4] Asgharpour, H؛ Kazerouni, A., and Mirani, N. (2015). "The Impact of Inflationary Environment on Exchange Rate Pass-Through on Import Price Index in Iran". Journal of Applied Economics Theories, No. 5: 155-178. (in Persian)

[5] Baldwin, R. (1988). “Hysteresis in import prices: the beachhead effect”, American Economic Review, Vol. 78, No. 4, pp. 773-785.

[6] Barhoumi, K. (2006). “Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation”, Economic Modelling, 23(6), pp. 926-951.

[7] Brun-Aguerre, R., Fuertes, A. M., & Phylaktis, K. (2012). “Exchange rate pass-through into import prices revisited: what drives it?”, Journal of International Money and Finance, 31(4), pp. 818-844.

[8] Campa, J. M., & Goldberg, L. S. (2005). “Exchange rate pass-through into import prices”, Review of Economics and Statistics, 87(4), pp. 679-690.

[9] Ca'Zorzi, M., Hahn, E., & Sanchez, M. (2007). “Exchange rate pass-through in emerging markets”,ECB Working Paper No. 739, March 2007.

[10] Cheikh, N. B., & Louhichi, W. (2016). “Revisiting the role of inflation environment in exchange rate pass-through: A panel threshold approach”, Economic Modelling, 52, pp.233-238.

[11] Falahi, F. & and Hashemi Dizaji, A R. (2010). "The Causal Relationship Between GDP And Energy Consumption In Iran Using Markov Switching Models". Journal of Energy Economics Studies, Seventh Year, No. 26: 131-152. (in Persian)

[12] Falahi, Firouz. (2014). "The Causality Of Markov Switching And The Relation of Production And Money In Iran". Iranian Journal of Applied Economic Studies, No. 11: 107-138. (in Persian)

[13] Forbes, K., Hjortsoe, I., & Nenova, T. (2018). “The shocks matter: improving our estimates of exchange rate pass-through”, Journal of International Economics, 114, pp 255-275.

[14] Gagnon, J. E., & Ihrig, J. (2004). “Monetary policy and exchange rate pass‐through”, International Journal of Finance & Economics, 9(4), pp.315-338.

[15] Ghosh, A. (2013). “Exchange rate pass through, macro fundamentals and regime choice in Latin America”, Journal of Macroeconomics, 35, pp. 163-171.

[16] Hamilton, J.D. (1983). Oil and the Macroeconomy since World War II, Journal of Political Economy, Vol. 91, Pp. 228–248.

[17] Hamilton, J.D. (2003). What Is an Oil Shock?, Journal of Economics, Vol. 113, Pp: 363-398.

[18] Hernandez, K., & Leblebicioğlu, A. (2012). A regime-switching analysis of pass-through. Review of World Economics, 148(3), 523-552.

[19] Holmes, M. J. (2009). “The response of exchange rate pass-through to the macroeconomic environment”, Open Business Journal, 2, pp.1-6.

[20] Junttila, J., & Korhonen, M. (2012). “The role of inflation regime in the exchange rate pass-through to import prices”, International Review of Economics & Finance, 24, pp. 88-96.

[21] Kazerouni, A., Salmani, B., and Feshari, M. (2012). "The Impact of Currency System and Inflationary Environment on the Exchange Rate Pass-through in Iran: (TVP) Approach". Rahe Andisheh Economic Research Quarterly Journal. 91: 95-116. (in Persian)

[22] Korhonen, I., & Wachtel, P. (2006). A note on exchange rate pass-through in CIS countries. Research in International Business and Finance, 20(2): 215-226.

[23] Lin, P. C., & Wu, C. S. (2012), “Exchange rate pass-through in deflation: The case of Taiwan”, International Review of Economics & Finance, 22(1), pp. 101-111.

[24] Mann, C. L. (1986). “Prices, profit margins, and exchange rates”, Fed, Res. Bull., 72, p. 366.

[25] Marazzi, M., Sheets, N., Vigfusson, R., Faust, J., Gagnon, J., Marquez, J., & Rogers, J. (2005). “Exchange rate pass-through to US import prices: some new evidence”, International Finance Discussion Papers, p. 833.

[26] Mehregan, N., Haqqani, M., and Salmani, Y., (2012). The Asymmetric Impact of Oil Price Shocks on the Economic Growth of OECD and OPEC Countries with Emphasis on the Shock Formation Environment and Regime Changes, Economic Modeling Quarterly, No. 19: 1-18. (in Persian)

[27] Mesbahi, M., sgharpour, H., Haghighat, J., Kazerouni, S A., Fallahi, F. (2017). The Degree of Exchange Rate Pass-Through on Import Prices In Iran, Emphasizing The Role of Oil Revenue Volatility (Nonlinear Approach). Journal of Economic Modeling, 11 (37): 77-100. (in Persian)

[28] Mesbahi, M., sgharpour, H., Haghighat, J., Kazerouni, S A., Fallahi, F. (2017). Nonlinear Investigation of Exchange Rate Pass-Through on Import Price with Emphasis on the Role of Inflation Instability in Iran. Journal of Applied Theories of Economics, Articles Ready to Publish, Accepted, Online Published from November 24, 2017. (in Persian)

[29] Ming Kuan, Ch. (2002). Lecture on The Markov Switching Model, Institute of Economics, Academia Sinica, Taipei 115, Taiwan; Site: www.sinica.edu.tw/as/ssrc/ckuan.

[30] Nogueira, R. P., & Leon-Ledesma, M. A. (2011). Does exchange rate pass-through respond to measures of macroeconomic instability?. Journal of Applied Economics, 14(1): 167-180.

[31] Ozkan, I., & Erden, L. (2015). “Time-varying nature and macroeconomic determinants of exchange rate pass-through”, International Review of Economics & Finance, 38, pp. 56-66.

[32] Razafimahefa, I. F. (2012). Exchange rate pass-through in Sub-Saharan African economies and its determinants.

[33] Shahbazi, K & Asadi, F. (2014). The Impact of Exchange Rate on Imports of Medicines and Medical Equipment. Journal of Economic Policy, No. 11: 35-54. (in Persian)

[34] Shintani, M., Terada-Hagiwara, A., & Yabu, T. (2013). “Exchange rate pass-through and inflation: A nonlinear time series analysis”, Journal of International Money and Finance, 32, pp. 512-527.

[35] Tashkini, A. & Bastani, A. (2006). "Estimation of Import Demand Function for Iranian Economy". Journal of Business Research, No. 40: 206-224. (in Persian)

[36] Verbeek, M (2005), A Guide to Modern Econometrics, Erasmus University Rotterdam, England, second edition, P300.

[37] Winkelried, D. (2014), “Exchange rate pass-through and inflation targeting in Peru”, Empirical Econپomics, 46(4), pp. 1181-1196.

[38] Yanamandra, V. (2015), “Exchange rate changes and inflation in India: What is the extent of exchange rate pass-through to imports?”, Economic Analysis and Policy, 47, pp. 57-68.