State-dependent exchange rate pass-through behavior

We estimate a Bayesian threshold vector autoregression (TVAR) to study the relationship between exchange rate pass-through and economic activity in Canada and Mexico. Both the model comparison and the analysis of impulse-response functions provide strong evidence of a nonlinear relationship and suggest that the exchange rate pass-through is dependent on the state of the economy. In particular, the pass-through coefficient is higher when the growth rate of output is large, and this difference is statistically significant across regimes for both countries. Furthermore, the results show that the degree of pass-through is complete in the case of import prices and that it falls along the distribution chain of goods.