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Nonlinear Mechanisms of the Exchange Rate Pass-Through: a Phillips curve model with threshold for Brazil

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  • Arnildo da Silva Correa
  • André Minella

Abstract

This paper investigates the presence of nonlinear mechanisms of pass-through from the exchange rate to inflation in Brazil. In particular, it estimates a 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, direction and magnitude of exchange rate changes, and exchange rate volatility. The results indicate that the short-run pass-through is higher when the economy is growing faster, when the exchange rate depreciates above some threshold and when exchange rate volatility is lower. These results have important implications for monetary policy and are possibly related to pricing-to-market behavior, menu costs of price adjustment and uncertainty about the degree of persistence in exchange rate movements.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps122.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 122.

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Date of creation: Nov 2006
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Handle: RePEc:bcb:wpaper:122

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Web page: http://www.bcb.gov.br/?english

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  1. Sergio A. Lago Alves & Mirta N. S. Bugarin, 2006. "The Role of Consumer's Risk Aversion on Price Rigidity," Working Papers Series 121, Central Bank of Brazil, Research Department.
  2. Marcelo Kfoury Muinhos & Sergio Afonso Lago Alves, 2003. "Medium-Size Macroeconomic Model for the Brazilian Economy," Working Papers Series 64, Central Bank of Brazil, Research Department.
  3. Márcio I. Nakane & Leonardo S. Alencar & Fabio Kanczuk, 2006. "Demand for Bank Services and Market Power in Brazilian Banking," Working Papers Series 107, Central Bank of Brazil, Research Department.
  4. Eduardo Lundberg, 2000. "Monetary Policy and Banking Supervision Functions on the Central Bank," Working Papers Series 2, Central Bank of Brazil, Research Department.
  5. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
  6. Ricardo Schechtman, 2006. "A Central de Risco de Crédito no Brasil: uma análise de utilidade de informação," Working Papers Series 119, Central Bank of Brazil, Research Department.
  7. Eduardo J. A. Lima & Felipe Luduvice & Benjamin M. Tabak, 2006. "Forecasting Interest Rates: an application for Brazil," Working Papers Series 120, Central Bank of Brazil, Research Department.
  8. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  9. Arnildo da Silva Correa, 2003. "Diferenças e Semelhanças entre Países da América Latina: Uma Análise de Markov Switching para os Ciclos Econômicos de Brasil e Argentina," Working Papers Series 80, Central Bank of Brazil, Research Department.
  10. Ricardo Schechtman & Valéria Salomão Garcia & Sergio Mikio Koyama & Guilherme Cronemberger Parente, 2004. "Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil - A Corporate Analysis," Working Papers Series 91, Central Bank of Brazil, Research Department.
  11. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series 109, Central Bank of Brazil, Research Department.
  12. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
  13. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2003. "Speculative attacks on debts and optimum currency area: A welfare analysis," Economics Working Papers (Ensaios Economicos da EPGE) 514, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  14. Francisco Marcos R. Figueiredo & Thaís Porto Ferreira, 2002. "Os Preços Administrados e a Inflação no Brasil," Working Papers Series 59, Central Bank of Brazil, Research Department.
  15. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
  16. Fajardo, J. & Farias, A., 2003. "Generalized Hyperbolic Distributions and Brazilian Data," Finance Lab Working Papers flwp_57, Finance Lab, Insper Instituto de Ensino e Pesquisa.
  17. Sergio A. L. Alves & Waldyr D. Areosa, 2005. "Targets and Inflation Dynamics," Working Papers Series 100, Central Bank of Brazil, Research Department.
  18. Eui Jung Chang & Marcelo Kfoury Muinhos & Joanílio Rodolpho Teixeira, 2002. "Macroeconomic Coordination and Inflation Targeting in a Two-Country Model," Working Papers Series 50, Central Bank of Brazil, Research Department.
  19. Ryan A. Compton & Jose Ricardo da Costa e Silva, 2005. "Finance and the Business Cycle: a Kalman Filter Approach with Markov Switching," Working Papers Series 97, Central Bank of Brazil, Research Department.
  20. Eduardo A. S. Rodrigues & Victorio Chu & Leonardo S. Alencar & Tony Takeda, 2006. "O Efeito da Consignação em Folha nas Taxas de Juros dos Empréstimos Pessoais," Working Papers Series 108, Central Bank of Brazil, Research Department.
  21. Pedro H. Albuquerque, 2000. "An Information Theory Approach to the Aggregation of Log-Linear Models," Working Papers Series 4, Central Bank of Brazil, Research Department.
  22. Marta Areosa & Waldyr Areosa, 2006. "The Inequality Channel of Monetary Transmission," Working Papers Series 114, Central Bank of Brazil, Research Department.
  23. Laxton, Douglas & Rose, David & Tambakis, Demosthenes, 1999. "The U.S. Phillips curve: The case for asymmetry," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1459-1485, September.
  24. Caner, Mehmet, 2002. "A Note On Least Absolute Deviation Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 18(03), pages 800-814, June.
  25. Marcelo Kfoury Muinhos & Sérgio Afonso Lago Alves & Gil Riella, 2002. "Modelo Estrutural com Setor Externo: Endogenização do Prêmio de Risco e do Câmbio," Working Papers Series 42, Central Bank of Brazil, Research Department.
  26. Alan Cosme Rodrigues da Silva & João Maurício de Souza Moreira & Myriam Beatriz Eiras das Neves, 2006. "Avaliação de Modelos de Exigência de Capital para Risco de Mercado do Cupom Cambial," Working Papers Series 111, Central Bank of Brazil, Research Department.
  27. Sergio R.S. Souza & Benjamin M. Tabak & Daniel O. Cajueiro, 2006. "Investigação da Memória de Longo Prazo na Taxa de Câmbio no Brasil," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 60(2), pages 193-209, November.
  28. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
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Citations

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Cited by:
  1. Benjamin M. Tabak, 2006. "The Dynamic Relationship between Stock Prices and Exchange Rates: evidence for Brazil," Working Papers Series 124, Central Bank of Brazil, Research Department.
  2. Andrés González & Hernán Rincóm & Norberto Rodríguez, 2008. "La transmisión de los choques a la tasa de cambio sobre la inflación," BORRADORES DE ECONOMIA 005089, BANCO DE LA REPÚBLICA.
  3. Nidhaleddine Ben Cheikh, 2012. "Non-linearities in exchange rate pass-through: Evidence from smooth transition models," Economics Bulletin, AccessEcon, vol. 32(3), pages 2530-2545.
  4. Nidhaleddine Ben Cheikh, 2012. "Nonlinear Mechanism of the Exchange Rate Pass-Through: Does Business Cycle Matter?," Working Papers halshs-00731502, HAL.
  5. Solange Gouvea, 2007. "Price Rigidity in Brazil: Evidence from CPI Micro Data," Working Papers Series 143, Central Bank of Brazil, Research Department.
  6. Nidhaleddine Ben Cheikh, 2013. "The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis," FIW Working Paper series 123, FIW.
  7. Adriana Soares Sales & João Barata Ribeiro Blanco Barroso, 2012. "Coping with a Complex Global Environment: a Brazilian perspective on emerging market issues," Working Papers Series 292, Central Bank of Brazil, Research Department.
  8. Sergio Rubens Stancato de Souza & Benjamin M. Tabak & Daniel O. Cajueiro, 2007. "Long-Range Dependence in Exchange Rates: the case of the European Monetary System," Working Papers Series 131, Central Bank of Brazil, Research Department.
  9. Reginaldo P. Nogueira Junior & Miguel Leon-Ledesma, 2008. "Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities," Studies in Economics 0801, Department of Economics, University of Kent.
  10. Przystupa, Jan & Wróbel, Ewa, 2009. "Asymmetry of the exchange rate pass-through: An exercise on the Polish data," MPRA Paper 17660, University Library of Munich, Germany.
  11. Marcelo Y. Takami & Benjamin M. Tabak, 2007. "Evaluation of Default Risk for The Brazilian Banking Sector," Working Papers Series 135, Central Bank of Brazil, Research Department.
  12. Gilneu F. A. Vivan & Benjamin M. Tabak, 2007. "A New Proposal for Collection and Generation of Information on Financial Institutions' Risk: the case of derivatives," Working Papers Series 133, Central Bank of Brazil, Research Department.
  13. Andrés González & Hernán Rincón & Norberto Rodríguez, . "La transmisión de los choques a la tasa de cambio sobre la inflación de los bienes importados en presencia de asimetrías," Borradores de Economia 532, Banco de la Republica de Colombia.
  14. Dubravko Mihaljek & Marc Klau, 2008. "Exchange rate pass-through in emerging market economies: what has changed and why?," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 103-130 Bank for International Settlements.
  15. Ricardo Schechtman, 2007. "Joint Validation of Credit Rating PDs under Default Correlation," Working Papers Series 149, Central Bank of Brazil, Research Department.
  16. Barbara Alemanni & José Renato Haas Ornelas, 2006. "Herding Behavior by Equity Foreign Investors on Emerging Markets," Working Papers Series 125, Central Bank of Brazil, Research Department.
  17. Muhammad Naveed Tahir, 2011. "Inflation Targeting, Exchange Rate and Financial Globalization," Working Papers halshs-00646601, HAL.
  18. Muhammad Naveed Tahir, 2011. "Inflation Targeting, Exchange Rate and Financial Globalization," Working Papers 1130, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.

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