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Exchange Rate Pass-Through in Brazil: À Markov Switching DSGE Estimation for the Inflation Targeting Period

Author

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  • Fabrizio Almeida Marodin

    (University of California Irvine)

  • Marcelo Savino Portugal

    (Universidade Federal do Rio Grande do Sul)

Abstract

This paper investigates the nonlinearity of exchange rate pass-through in the Brazilian economy during the inflation targeting period (2000–2018) using a Markov-switching new Keynesian DSGE model. We find evidence of two distinct regimes for exchange rate pass-through and for the volatility of shocks to inflation. Under the so-called ‘normal’ regime, the long-run pass-through to consumer prices inflation is estimated as almost zero, only 0.00057 of a percentage point given a 1% exchange rate shock. In comprasion, the expected pass-through to inflation under a ‘crisis’ regime is 0.1035 of a percentage point, for the same exchange rate shock. These results allow us to identify four distinct cycles for exchange rate pass-through during the inflation targeting period in Brazil, and suggest that higher central bank credibility and anchored inflation expectations may be related to lower levels of pass-through.

Suggested Citation

  • Fabrizio Almeida Marodin & Marcelo Savino Portugal, 2019. "Exchange Rate Pass-Through in Brazil: À Markov Switching DSGE Estimation for the Inflation Targeting Period," Russian Journal of Money and Finance, Bank of Russia, vol. 78(1), pages 36-66, March.
    • Handle: RePEc:bkr:journl:v:78:y:2019:i:1:p:36-66
    DOI: 10.31477/rjmf.201901.36
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    More about this item

    Keywords

    exchange-rate pass-through; New Keynesian model; DSGE; regime switching; Markov chain; central bank credibility;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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