Taiwan is usually considered as a small open economy. Trade and exchange rate policies in Taiwan have substantially changed since 1990s.Not only has trade been liberalized, but exchange rates of the New Taiwan Dollar(NTD) were also allowed to fluctuate. This paper applies the Threshold Regression with Endogenous Threshold Variables(THRET) Model that puted forward Kourtellos, Stengos and Tan (2007) and combines the expectation-augmented Phillips curve with a threshold for the pass-through. The paper examines whether the short-run magnitude of the pass-through is affected by the business cycle. For that purpose, the important variable is tested as thresholds: output gap change. The results indicate that the short-run pass-through is higher when the the economy is booming, as well as the exchange rate depreciates above some threshold. And showed in this has conformed to the business cycle theory which Goldfajn and Werlang (2000) , Carneiro, Monteiro and Wu (2002) , Muinhos (2001) proposed.

The implication of credit rationing models states that the effect of monetary policy on output may be stronger when credit conditions are tight than when they are loose. Therefore, there may be a thresholde effect on the relation between real money supply and output. Existing empirical studies on testing threshold effects ignore the fact that the monetary policy and the credit conditions are endogenous, which are follow some optimal rules. Seeing that the past studies considering the endogenous monetary policy only cannot provide substantial evidence of the credit rationing theory, this article provides an extending test of threshold effects when monetary policy and the indicator of credit conditions are endogenous. Moreover, this study finds that the US aggregate data can still provide significant evidence of a threshold effect on the relation between money and output, comparing to the endogenous monetary policy partially considered.