Nonlinear exchange-rate pass-through in emerging markets

This paper documents nonlinearities and asymmetries in the transmission of exchange rate fluctuations to prices in a panel of 27 emerging markets for the period 1990-2013. Using local projection techniques, we find evidence of asymmetry in the extent of exchange-rate pass-through during episodes of appreciation relative to episodes of depreciation. We then test for the presence of a threshold that can lead to nonlinearities when the exchange rate experiences a large depreciation. The findings suggest that the pass-through becomes nonlinear when the exchange rate depreciates by more than 24%. Wealso find that, in line with the literature, the adoption of inflation targeting reduces the degree of exchange-rate pass-through. These results are robust to various econometric specifications that account for the presence of outliers and potential endogeneity concerns.