Long-Run Asymmetric Exchange Rate Pass-Through under Partial Dollarization: NARDL Evidence from Lao PDR

Abstract

This study examines how long-term exchange rate changes affect consumer prices in a small, open, and partially dollarized economy, focusing on the Lao People's Democratic Republic (Lao PDR) as a case study. This research analyzes annual time-series data from 1991 to 2024. It applies a Nonlinear Autoregressive Distributed Lag (NARDL) model to distinguish between the effects of exchange rate depreciation and appreciation. It also tests for asymmetries in both the short-run and long-run.

The NARDL model's estimation shows that kip depreciation has an almost one-to-one long-run pass-through to consumer prices, with a depreciation coefficient (lnER⁺) of 0.98, significant at the 1% level. In contrast, the effect of appreciation (lnER⁻) is small and statistically insignificant. The Wald test results clearly confirm the asymmetry of long-run ERPT (F = 9.85, p < 0.01).

In the short run, pass-through pressure occurs only from exchange rate depreciation. The price system returns to the long-run equilibrium fairly quickly. The error-correction mechanism (ECT = −0.79) accounts for about 79% of deviations over a year. Furthermore, the level of dollarization (FCD/M2) has a negative, significant long-run coefficient, reflecting its role in reducing inflationary pressures. Meanwhile, domestic output and world oil prices are significant factors that increase price pressures.

These findings add to the ERPT research on CLMV (Cambodia, Lao PDR, Myanmar, and VietNam) countries by showing that the uneven exchange rate pass-through in Laos is a long-term structural feature. This matters for shaping exchange rate policy, keeping inflation in check, and reducing reliance on foreign currency over time.