Time-Varying Exchange Rate Pass-Through Over 2005-2021 Using Dynamic Model Averaging

This study aims to re-examine the time-varying structure of exchange rate pass-through (ERPT), adopting a distinct empirical route, dynamic model averaging (DMA) method. This method allows both parameters and predictors of the model to change over time, encompassing model uncertainty in the derivation of the time varying ERPT degrees. DMA is applied to quarterly time series data spanning from 1996:1-2021:3 for each of 39 advanced and emerging economies in the sample. The results show the presence of a change in the dynamics of ERPT degrees triggered by the global crisis in 2008-09. The ERPT degrees are quite low but rising since the pandemic in all advanced countries. The ERPT degrees are twice higher in emerging economies and present a U-shaped pattern over the sample period. In addition, the degrees of ERPT seem to be getting larger with the larger average inflation rate and have a weakly positive relationship with Openness in emerging economies