Review of World Economics

, Volume 148, Issue 3, pp 523–552 | Cite as

A regime-switching analysis of pass-through

  • Kolver Hernandez
  • Aslı Leblebicioğlu
Original Paper


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.


Exchange rate pass-through Markov regime-switching 

JEL Classification

F31 F40 



We thank the editor, Harmen Lehment, and an anonymous referee, Fabio Ghironi, Tom Grennes, Nan Li, Catherine L. Mann, Helen Naughton, Katheryn Russ, Tanseli Savaser and Martha Starr for their helpful suggestions and comments. We also thank the seminar participants at the Board of Governors of the Federal Reserve System, the University of Delaware, North Carolina State University and the University of Oklahoma for their comments. Any error is ours.


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Copyright information

© Kiel Institute 2012

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of DelawareNewarkUSA
  2. 2.Department of EconomicsNorth Carolina State UniversityRaleighUSA

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