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A regime-switching analysis of pass-through

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  • Kolver Hernandez
  • Aslı Leblebicioğlu

Abstract

We empirically investigate how various economic factors affect the changes in the pricing policies of exporters, in particular changes in the exchange rate pass-through. Assuming exporters set prices following either a high or a low pass-through pricing policy, and assuming that the transition probabilities between these pricing policies depend on market concentration, exporting country’s market share and monetary stability, we estimate a Markov regime-switching model, using data we have collected on imported cars to the United States. Our findings show that the “low pass-through” regime is characterized by: lower exchange rate pass-through, low response to misalignments in the firm’s relative price, low volatility of exogenous shocks, and higher duration. When we decompose the changes in the pass-through in our sample, we find that monetary stability has been the most important factor behind the decline in the pass-through. Monetary stability explains more than 50% of the decline in the exchange rate pass-through, while country market share and market concentration explain about 25 and 10%, respectively. Copyright Kiel Institute 2012

Suggested Citation

  • Kolver Hernandez & Aslı Leblebicioğlu, 2012. "A regime-switching analysis of pass-through," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(3), pages 523-552, September.
    • Handle: RePEc:spr:weltar:v:148:y:2012:i:3:p:523-552
    DOI: 10.1007/s10290-012-0120-7
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    1. Nils Herger, 2015. "Market Entries and Exits and the Nonlinear Behaviour of the Exchange Rate Pass-Through into Import Prices," Open Economies Review, Springer, vol. 26(2), pages 313-332, April.
    2. Herger Nils, 2013. "Market Entries and Exits and the Nonlinear Behaviour of the Exchange Rate Pass-Through into Import Prices," Working Papers 13.08, Swiss National Bank, Study Center Gerzensee.

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    More about this item

    Keywords

    Exchange rate pass-through; Markov regime-switching; F31; F40;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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