Some popular misconceptions about small country pass-through

In the theoretical pass-through literature at present it is predicted that a small open economy will exhibit complete pass-through. The objective of this paper is to show that this is a popular misconception, and this aim is fulfilled by presenting four different scenarios which are able to explain incomplete small country pass-through. The first scenario supposes that domestic producers of import substitutes are imperfectly competitive when grouped together, the second assumes that foreign exporters use imported inputs, the third examines a case in which there exists other 'large' countries demanding or supplying the traded good, and the fourth assumes a mixed currency denomination of trade contracts. The theoretical contention of incomplete small country import pass-through is examined in the context of the results of over 50 empirical pass-through studies.