Empirical Evidence on the Role of Inflation Regime in the Exchange Rate Pass-Through to Import Prices

We examine exchange rate pass-through into aggregate import prices for several industrialized countries in view of Taylor's (2000) suggestion that the degree of pass-through is dependent on importing country inflation. Extending the standard mark-up pricing model under monopolistic competition towards a setting where the pricing decision is dependent on the importing country inflation rate regime, and using nonlinear smooth transition estimation methodology we present empirical evidence for the inflation regime dependence of pass-through elasticities for several OECD countries. The pass-through seems to be incomplete and positively correlated with the importing country inflation rate