Asymmetric and Non-linear Exchange Rate Pass-Through

Due to downward price rigidities, market share objectives, binding quantity constraints and menu costs the responses of import prices to exchange rate changes can be asymmetric and non-linear. In this paper, regression equation augmented with interactive dummy variables is used on quarterly data from 1980 to 2014 for six different countries, Germany, Iceland, New Zealand, Sweden, the U.K. and the U.S., in an attempt to test whether the direction and the size of the exchange rate change matters for pass-through to import prices. The results indicate that asymmetry cannot be neglected. For the U.S. and Sweden, evidence of asymmetric behavior is found but the direction of asymmetry varies between the two countries. For no country can the restriction of linear passthrough be rejected, unless when also taking into account the direction of the change, suggesting that the direction effects overshadow the size effects