Re-examining the exchange rate pass-through into import prices using non-linear estimation techniques: Threshold cointegration

We document a significant threshold cointegrating relationship among effective nominal exchange rates and import prices. Using quarterly data for five industries of 16 OECD countries, we find that the degree of pass-through improves dramatically from the 50% average documented in the literature once threshold effects are recognized. The results of our threshold cointegration model show that import prices respond faster and by a larger extent to nominal exchange rate shocks than is the case for more conventional models. These findings give empirical support to the hypothesis that an equilibrium rate of pass-through exists (e.g. [Bacchetta, P., & Van Wincoop, E. (2005). A Theory of the currency denomination of international trade, Journal of International Economics 67, 295-319; Devereux, M., Engel, C., & Storgaard, P. (2004). Endogenous exchange rate pass-through when nominal prices are set in advance, Journal of International Economics 63(2), 263-291]).