This study investigates the dynamics of exchange rate pass-through (ERPT) in Morocco.
Using a two-regime Markov Switching Model (MSM) with quarterly data from 1998Q1 to 2024Q4. The MSM is employed to capture potential non-linearities and structural changes in the relationship between exchange rate fluctuations and consumer price inflation, particularly in light of the 2018 exchange rate regime reform.
The results reveal a profound non-linearity, identifying two distinct and highly persistent states. The dominant regime, representing the economy's “Normal State”, is characterized by a statistically insignificant pass-through, effectively zero. In contrast, a second, rarely occurring “Crisis State” features an extremely high and significant ERPT of 7.51, indicating periods where inflation becomes hyper-sensitive to currency fluctuations. Crucially, the analysis finds no evidence that the 2018–2020 exchange rate reforms triggered a regime shift. The economy remained firmly in the zero pass-through state before, during and after the reforms, with the only shift into the crisis state being driven by the global inflation shock of 2021–2022. This suggests that while Morocco's inflation dynamics are resilient to domestic policy adjustments, they remain vulnerable to severe external shocks.
This research distinguishes itself by being among the first to employ a Markov-switching approach to specifically model ERPT in Morocco. While previous studies have utilized methodologies such as the structural vector autoregression (SVAR) or ARDL.
