External Vulnerabilities and Exchange Rate Pass-Through: The Case of Emerging Markets

External Vulnerabilities and Exchange Rate Pass-Through: The Case of Emerging Markets

21/05

Abdullah Kazdal, Muhammed Hasan Yılmaz

English

February 2021

This study investigates the differentiation of exchange rate-inflation nexus in emerging markets (EM) in the context of external vulnerabilities for the period 2010-2018. In the empirical setting, EM countries are classified into two subgroups as “more vulnerable” and “less vulnerable” according to vulnerability indicators to identify how exchange rate pass-through (ERPT) dynamics change when the vulnerability is amplified by utilizing the interacted panel vector autoregression (IPVAR) model. Empirical results show that more resilient EM countries are experiencing a lower degree of ERPT during the sample period. Countries facing more prominent dollarization and current account deficit are subject to stronger ERPT, while higher inflation, higher risk premium and higher FX debt levels are associated with increasing ERPT as well. On the other hand, countries with higher reserve adequacy or higher foreign direct investment show lower ERPT compared to lower EM groups.

C23; E31; F31