Has the pass-through of the US dollar to US imports changed over time?

This study investigates whether the passthrough from the US dollar to the price of US non-oil imports has changed over time, secondly whether this question can best be studied using static or dynamic modeling. Two main conclusions can be made:

• The exchange rate pass-through changes over time, why a linear model allowing the pass-through to vary over time is preferable to log-linear models that assume constant pass-through
• A model using three lags of both dependent and independent variables have a higher explanatory power (adjusted R²=0.74) than both linear (adjusted R²=0.64) and log-linear models (adjusted R²=0.61) that only include a single lag of the dependent variable but no lags of the independent variables.

Diagram 1 and 2 below show how the exchange rate pass-through has changed over time for both linear (variable pass-through) and log-linear models (constant pass-through) that use only a single lag of the dependent variable. From the two diagrams the common finding in literature that the pass-through has decreased cannot be accepted unconditionally. For the period studied the exchange rate pass-through has varied, and while more data is needed to establish this, then there is some evidence of cyclicality in the pass-through.

Diagram 1: short-run pass-through                              

Diagram 2: long-run pass-through

 
You can read the rest of my analysis here: bit.ly/2jU1aO6