Effect of Exchange Rate Pass-through on Import Price Index: Smooth Transition Regression Approach

The main objective of this research is to study the Taylor hypothesis (based on the role of the inflation environment) in Iran. For this purpose, seasonal time series data of the Iranian economy have been used during the 1988:Q1-2015:Q4 period and smooth transition regression model has been used. The empirical findings show that the import price in the high inflationary regime is lower than the low inflationary one, and Taylor's hypothesis is confirmed. The degree of exchange rate pass-through to import price index under the low inflation regime is 0.30414 and 0.09061 in short and long run, respectively. In a high inflation regime, it is 0.58202, 0.72016 respectively in short and long run. Therefore, inflation control policies can have a positive impact on reducing the exchange rate pass-through to the import price index.