Nonlinear Exchange Rate Pass-Through: The Role of National Debt

This study uses the panel smooth transition regression model with a debt ratio as the transition variable to evaluate the level of exchange rate pass-through. This model can investigate the threshold effect of the debt ratio on the pass-through. To perform the empirical estimation, we choose the 22 Organization for Economic Co-operation and Development member countries during 1994–2013 as sample objects. The empirical results show that the exchange rate pass-through displays a nonlinear and smooth transition process, depending on each period of debt ratio of the export country in different regimes. That is, the pass-through is nonlinear and varies with time and across countries. The larger the debt ratio is, the lower the pass-through would be. The threshold for the pass-through to generate smooth regime switching is 36.62% of debt ratio.