Phillips curve and the exchange rate pass-through: a time–frequency approach

This work analyzes the exchange rate pass-through to inflation in Brazil through a methodology that simultaneously considers the time and the frequency domains applied to a New Keynesian Phillips Curve with exchange rate. For this purpose, we employ the continuous wavelet transform methodology that allows for disaggregating effects in different frequency bands over time. The results show that, in general, the relationship between inflation and the exchange rate is generally weak for the short and medium run (high frequencies), except in some periods marked by financial crises, political instability, and high inflation. On the other hand, we found strong evidence of the relationship between inflation and the exchange rate in the long run (low frequencies). A robustness analysis using different inflation and exchange rate measures, such as free prices, tradable and non-tradable prices, and the real effective exchange rate, confirms the results previously found in the baseline model.