THE ASYMMETRY OF EXCHANGE-RATE PASS-THROUGH TO PRODUCER PRICES IN IRAN: MARKOV SWITCHING APPROACH

Hasan FARAJOLLAHI¹
Hossein ASGHARPOUR²*
Behzad SALMANI²
Alireza KAZEROONI²
Mohammad Mahdi BARGHI OSKOOEE³

ABSTRACT

The present article aims to investigate the effects of positive and negative shocks of exchange rate on the asymmetry of exchange-rate pass-through on domestic prices in Iran during 1981-2014. To this aim, first, using the Markov-Switching model, the positive and negative shocks were extracted. Then, using the co-integration test of Johansen and Juselius, the asymmetry of exchange-rate pass-through to producer prices in Iran, along with the effectiveness of nominal exchange rate variables, gross domestic production, the volume of liquidity and the trade openness of the economy were investigated. The empirical findings of the research indicated the asymmetry of the exchange-rate pass-through to the producer price. The results showed that, first, in Iran's economy, the exchange-rate pass-through on the producer price is approximately 0.5 which is incomplete. Second, the degree of passage to the producer price in the case of positive shocks of the exchange rate is significantly more than the negative shocks of the exchange.

Keywords: Asymmetric Exchange-Rate Pass-Through, Markov-Switching Model, Johansen and Juselius Co-Integration, Producer Price

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