The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis

23 Pages Posted: 5 Nov 2015

See all articles by Nidhaleddine Ben Cheikh

Nidhaleddine Ben Cheikh

ESSCA School of Management; CREM - UMR CNRS 6211

Christophe Rault

IZA Institute of Labor Economics; University of Orleans; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: October 13, 2015

Abstract

This paper investigates whether exchange rate pass-through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass-through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits.

Keywords: exchange rate pass-through, import prices, sovereign spreads, smooth transition models

JEL Classification: C220, E310, F310

Suggested Citation

Ben Cheikh, Nidhaleddine and Rault, Christophe and Rault, Christophe, The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis (October 13, 2015). CESifo Working Paper Series No. 5550, Available at SSRN: https://ssrn.com/abstract=2686508 or http://dx.doi.org/10.2139/ssrn.2686508

Nidhaleddine Ben Cheikh

ESSCA School of Management ( email )

1, Rue Joseph Lakanal
Angers, 49000
France

HOME PAGE: http://https://sites.google.com/site/nidhaleddinebencheikh/

CREM - UMR CNRS 6211

7, Place Hoche
Rennes, 35065
France
0033617743574 (Phone)

Christophe Rault (Contact Author)

University of Orleans ( email )

Rue de Blois
BP 6739
LEO, Orleans, Orleans cedex 2 45067
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
63
Abstract Views
732
Rank
516,629
PlumX Metrics