National University of Kyiv-Mohyla Academy, Kyiv, Ukraine
This paper aims to estimate the degree of exchange rate pass-through (ERPT) to domestic prices in Ukraine considering nonlinearities with respect to the size and direction of exchange rate movements. We use disaggregated consumer price data and employ a panel autoregressive distributed lag model (ARDL) including threshold parameters to account for nonlinearities in the ERPT mechanism. We then compute dynamic ERPT coefficients taking into account inflation and exchange rate persistence. Estimation results suggest that the pass-through effect to core consumer prices is higher from currency depreciation than in the case of appreciation. On the contrary, we find that raw food prices are much more sensitive to appreciations. We also find that price responsiveness to small, medium, and large exchange rate changes is nonlinear. In particular, we provide evidence that prices are sensitive to small and extremely large changes, but the pass-through effect is insignificant if exchange rate movements are moderate.
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