A regime-switching analysis of pass-through

Kolver Hernandez and Asli Leblebicioglu ()

Review of World Economics (Weltwirtschaftliches Archiv), 2012, vol. 148, issue 3, 523-552

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

Keywords: Exchange rate pass-through; Markov regime-switching; F31; F40 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/s10290-012-0120-7

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