Exchange rate pass-through (ERPT) remains a central issue for small open economies where imported inputs and consumption goods transmit external shocks into domestic inflation. For Azerbaijan, where the exchange rate has experienced discrete adjustment episodes alongside periods of nominal stability, a linear and constant pass-through assumption can be misleading for forecasting and stabilisation policy. This study estimates ERPT to consumer prices using monthly data and explicitly tests for nonlinearities across inflation regimes. The empirical design combines (i) (i) (i) (i) (i) (i) a baseline distributed-lag framework linking exchange rate movements to CPI inflation and (ii) regime-dependent specifications, implemented through threshold and Markov-switching models, to allow pass-through to vary between low- and high-inflation states. The analysis distinguishes headline CPI from subcomponents (tradables versus core measures, where available) and controls for external cost pressures via international commodity price indicators. Results are reported in a fully auditable format: regime classification rules are stated ex ante, model diagnostics are documented, and robustness checks trace each deviation from the baseline specification. The study contributes evidence relevant to inflation targeting credibility, communication strategy, and vulnerability monitoring in the tradable sector.
Asif Mustafayev (Thu,) studied this question.