Nonlinear input cost pass-through to consumer prices: a threshold approach

This paper examines a possible nonlinearity in the pass-through to consumer price index (CPI) inflation of increases in firms' input costs. Extending the existing econometric framework, we propose a threshold model with multiple cost variables and unknown thresholds. An empirical analysis shows that the proposed model is favoured over a linear one and existing threshold models in terms of in-sample model fit. The empirical results indicate that the linear model risks underestimating the degree of the pass-through of an input-cost increase that exceeds the threshold.