Market Entries and Exits and the Nonlinear Behaviour of the Exchange Rate Pass-Through into Import Prices

This paper develops an empirical framework giving rise to a nonlinear
behaviour of the exchange rate pass-through (ERPT). Rather than shifts between low
and high inflation, the nonlinearity arises when large swings in the exchange rate
trigger market entries and exits of foreign firms. Switching regressions are used to
distinguish between low and high pass-through regimes of the exchange rate into
import prices. For the case of Switzerland, the corresponding results suggest that,
though inflation has been low and stable, the ERPT still doubles in value in times of
a rapid appreciation of the Swiss Franc.