Exchange rate pass-through: Testing for structural change and its causes

Abstract

It is widely held that the responsiveness of import prices to the dollar's foreign currency value declined in the 1980s. This article is an empirical examination of the behavior of aggregate exchange rate pass-through and the causes of its behavior. The effect of the dollar's expected value, changes in market structure, and the source and composition of imports on import price decisions are examined by estimating pass-through, import price-exchange rate expectation elasticities, and profit markup and foreign production cost-exchange rate elasticities. The behavior of pass-through found here is similar to that reported elsewhere. Evidence is found that exchange rate expectations and changing market structure have reduced the level of aggregate pass-through of manufactured goods.