The Impact of Macroeconomic Instability on Exchange Rate Pass Through: Some Evidence from Smooth Transition Regression (STR) Model

Author
Saeed Rasekhi
University of Mazandaran
10.18869/acadpub.jemr.6.22.7
Abstract
Regarding to the importance of the relationship between macroeconomic instability and exchange rate pass-through, present study by using EGARCH and smooth transition regression (STR) model has examined the nonlinear effect of macroeconomic instability on the exchange rate pass-through of Iran during the period 1963-2010. For this, firstly the macroeconomic instability index has been estimated using EGARCH and then, by using STR, the research hypothesis which is that the macroeconomic instability has a nonlinear and positive effect on the exchange rate pass-through has been examined. Based on the obtained results in this research, macroeconomic instability has the macroeconomic instability has a positive effect on the exchange rate pass through in both regimes, although an increasing in volatility increases rate pass-through. So, the sequence of economic policies is important and specifically, we suggest that macroeconomic instability reduction policies should be prior to exchange rate policies.
Keywords
Macroeconomic Instability
Exchange Rate Instability
Exchange Rate Pass Through
STR Model
Iran