Essays on Exchange Rate and Inflation Dynamics

Download or read book Essays on Exchange Rate and Inflation Dynamics written by Noor Mohammad Uddin and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: "This thesis explores the relationship between the exchange rate and the domestic price level in three essays. The first essay (Chapter 2) examines the causality between the exchange rate and consumer prices, and estimates the extent of the exchange rate pass-through to consumer prices for 12 OECD countries for the period 1974 to 2016. Using the adoption of the Euro and the adoption of the policy of targeting inflation in these countries, which represent changes in the monetary policy regime, I divide this time period into two groups and examine causality and pass-through behaviour separately for each country. Based on a newly developed causality measure for multiple horizons, I found that the direction of causality from consumer prices to exchange rate becomes stronger for the countries with the Euro while the direction of causality from the exchange rate to consumer prices becomes stronger for the inflation targeting countries after their respective regime change. By deriving the impulse response functions from a recursive vector autoregressive model, I found that the exchange rate pass-through to consumer prices is not statistically different from zero for the countries with the Euro while the pass-through is statistically significant in four out of the six remaining countries. Before the regime change, the evidence on both fronts was somewhat mixed among these two sets of countries. The second essay (Chapter 3) examines whether the aggregate price level responds asymmetrically to exchange rate appreciations and depreciations in 12 Asian countries for the period 1994 to 2016. Using a recently developed response-based test, I found evidence of asymmetric responses of the consumer price index to exchange rate appreciations and depreciations in 6 out of the 12 countries. The slope-based test also provides evidence of asymmetry for 6 countries, but the results are the same as the response-based tests only for 4 countries. Further, depreciations are not necessarily passed-through to prices more than the appreciations. The third essay (chapter 4) examines the purchasing power parity (PPP) hypothesis for our selected 12 Asian countries for the period 1974 to 2016. Since stationarity of the real exchange rate implies that PPP holds, I employ unit root tests on the real exchange rate in the presence of multiple structural breaks. Our findings support the PPP hypothesis for six countries. Further, there is no additional evidence of trend stationarity of the series in these countries, so that there is no support for the Harrod-Balassa-Samuelson hypothesis. " --