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Title: To what extent globalization affects exchange rate pass-through: The role of global value chains Authors:  Jan Hagemejer - Narodowy Bank Polski (Poland) [presenting]
Aleksandra Halka - Narodowy Bank Polski (Poland)
Jacek Kotlowski - Narodowy Bank Polski (Poland)
Abstract: The aim is to investigate to what extent the increasing participation in the global value chains influences the exchange rate pass-through to inflation. We use a broad panel data set to check whether the growing trade in intermediate goods leads to decrease of ERPT. We use a novel one-step approach and apply the panel smooth transition regression model to address the problems of co-linearity and also to account for potential non-linearities in the impact of GVC participation on ERPT. We test for non-linearity first and we find ERPT being non-linear in respect to intensity of GVC participation. We also find the logistic function as a proper transition function in PSTR model. In contrary to existing research, we investigate direct ERPT to producer prices instead of import prices. We employ several control variables to account for potential impact of other factors, which constitute an alternative explanation for decline in exchange rate pass-through. We use also different measures of GVC participation to increase the robustness of our results. We find that the growing GVC backward participation of the suppliers of imported intermediate input results in reducing the ERPT to producer prices. We also evidence that this effect is non-linear. The ERPT for countries strongly involved in the global value chains production is significantly smaller than for economies not participating in GVC.