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 influenced by inflation where stable rates of inflation increase the probability of remaining in a low pass through regime.