EXCHANGE RATE PASS-THROUGH, IMPORT PRICES AND INFLATION UNDER STRUCTURAL BREAKS

• Main Author: Arintoko Arintoko
• Format: Article
• Language: English
• Published: Universitas Islam Indonesia 2011-09-01
• Series: Economic Journal of Emerging Markets
• Online Access: http://jurnal.uii.ac.id/index.php/JEP/article/view/2320

This research estimates the exchange rate pass-through (ERPT) into import prices by applying an extension of the basic model of ERPT on Indonesia. It estimates models of cointegration and error-correction mechanism (ECM), with and without structural breaks. It uses the techniques of Zivot-Andrews and of Gregory-Hansen to test for structural breaks and cointegration with the structural breaks, respectively. The results show that with the control variables, inflation affects import prices and lower the pass-through for short term, in a condition of free floating exchange rate. In the short term, with the inclusion of structural breaks, significant inflation affects import prices and lowers the ERPT coefficient.  <br /><br />Keywords:    Exchange rate pass-through, inflation, structural breaks, cointegration, error-correction mechanism<br />JEL classification numbers: C22, C32, E31, F41 <br />