The Response of Exchange Rate Pass-Through to the Macroeconomic Environment

Abstract

This paper offers new insights into the nature of exchange rate pass through modelling in the context of a Markov regime-switching environment. Using New Zealand data, the results indicate that pass through to import prices resulting from fluctuations in the exchange rate or exporter costs can be characterised as regime-specific. Furthermore, there is evidence that the probability of switching between higher and lower pass through regimes is significantly influ- enced by inflation where stable rates of inflation increase the probability of remaining in a low pass through regime.