International Review of Applied Economics,
Vol. 18, No. 3, 301-322, July 2004

Exchange Rate Pass-through: The Role of Regime Changes
DOUGLAS STEEL & ALAN KING

ABSTRACT We consider the effect on the degree of exchange rate pass-through of the exchange rate regime in operation. We test the hypothesis that pass-through will he lower under a float as firms may be reluctant to pass appreciations or depreciations on to their customers when there is a strong chance that they will he subsequently reversed. Taylor's hypothesis that pass-through will he lower in a low-inflation environment is also considered. Both hypotheses are assessed in relation to the price of manufactured imports into New Zealand and we find that, whereas the shift to afloat dramatically lowered the degree of pass-through, the later shift to a low-inflation regime has no significant additional effect on the pass-through relationship.