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The Impact of external vulnerabilities on exchange rate pass-through: recent longitudinal evidence from emerging markets

Kazdal, Abdullah
This thesis investigates the effects of structural vulnerabilities on the nexus between exchange rate and inflation in Emerging Markets for the recent time period. It is observed that there is a considerable heterogeneity among Emerging Markets regarding selected vulnerability sources. In the study, firstly EM countries are classified into two subgroups as "highly vulnerable" and "low vulnerable" according to median levels for each categorization. Then, the possible differences between high and low country groups in terms of exchange rate pass-through (ERPT) to inflation is examined. Results show that more resilient EM countries are experiencing lower ERPT levels. For instance, countries with higher level of dollarization shows higher ERPT compared to lower dollarization group. Moreover, countries with higher current account deficit or external financing need shows higher ERPT levels. Additionally, higher level of inflation, higher country risk premium and higher foreign currency debt can be associated with increasing ERPT. On the other hand, countries with higher reserve adequacy or higher foreign direct investment shows lower ERPT compared to lower EM groups.