Advanced Search
MyIDEAS: Login to save this paper or follow this series

Does The Exchange Rate Pass-Through Into Prices Change When Inflation Targeting Is Adopted? The Peruvian Case Study Between 1994 And 2007

Contents:

Author Info

  • Paul Castillo
  • Luis Maertens Odria
  • Gabriel Rodríguez

    ()
    (Departamento de Economía - Pontificia Universidad Católica del Perú)

Abstract

This paper analyzes whether the exchange rate pass-through into prices changed when the inflation targeting scheme was adopted in Peru. Firstly, a small dynamic stochastic general equilibrium model is simulated, which shows that adopting this scheme induces an increase in exchange rate volatility. Furthermore, applying the theory of the currency denomination of international trade, it is demonstrated that increased exchange rate volatility reduces the share of firms that set their prices in foreign currency (dollars). Given that the pass-though has a direct relationship with this share, it is shown that adopting inflation targeting generates a pass-through contraction. Secondly, we empirically test whether the Peruvian Central Bank’s decision to adopt inflation targeting in January 2002 actually had an effect on the pass-through estimating a time-varying vector autoregressive model which allows for an asymmetrical estimation of the pass-through. It provides parameters for both the pre and post inflation targeting regimes based on the assumption that the transition from one regime to the other is smooth. An analysis of the generalized impulse response functions reveals that the decision to adopt inflation targeting significantly decreased the exchange rate pass-throughs into import, producer, and consumer prices. The results are consistent with economic theory and are robust to the specification of parameters of the model.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://departamento.pucp.edu.pe/economia/images/documentos/DDD314.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Departamento de Economía - Pontificia Universidad Católica del Perú in its series Documentos de Trabajo with number 2011-314.

as in new window
Length: pages
Date of creation: 2011
Date of revision:
Publication status: published
Handle: RePEc:pcp:pucwps:wp00314

Contact details of provider:
Postal: Av. Universitaria 1801, San Miguel, Lima, Perú
Phone: (511) 626-2000 ext. 4950, 4951
Fax: (511) 626-2874
Email:
Web page: http://www.pucp.edu.pe/departamento/economia/
More information through EDIRC

Related research

Keywords: Inflation targeting/exchange rate pass-through into prices/ TV-VAR models;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lundbergh, Stefan & Teräsvirta, Timo & van Dijk, Dick, 2000. "Time-Varying Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance 376, Stockholm School of Economics.
  2. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
  3. Changli He & Timo Terasvirta & Andres Gonzalez, 2009. "Testing Parameter Constancy in Stationary Vector Autoregressive Models Against Continuous Change," Econometric Reviews, Taylor & Francis Journals, vol. 28(1-3), pages 225-245.
  4. Weise, Charles L, 1999. "The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 85-108, February.
  5. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  6. Jonathan McCarthy, 2000. "Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies," Staff Reports 111, Federal Reserve Bank of New York.
  7. Bacchetta, Philippe & van Wincoop, Eric, 2002. "A Theory of Currency Denomination of International Trade," CEPR Discussion Papers 3120, C.E.P.R. Discussion Papers.
  8. Philippe Bacchetta & Eric van Wincoop, 2001. "A Theory of the Currency Denomination of International Trade," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.13, Université de Lausanne, Faculté des HEC, DEEP.
  9. Leonardo Leiderman & Rodolfo Maino & Eric Parrado, 2006. "Inflation Targeting in Dollarized Economies," IMF Working Papers 06/157, International Monetary Fund.
  10. Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany.
  11. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," NBER Working Papers 9543, National Bureau of Economic Research, Inc.
  12. De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.
  13. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  14. Simon M. Potter, 1999. "Nonlinear impulse response functions," Staff Reports 65, Federal Reserve Bank of New York.
  15. Winkelried, Diego, 2003. "¿Es asimétrico el pass-through en el Perú?: Un análisis agregado," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 10.
  16. Marco Vega & Diego Winkelried, 2005. "Inflation Targeting and Inflation Behavior: A Successful Story?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  17. repec:nbr:nberwo:12876 is not listed on IDEAS
  18. Alberto Humala & Gabriel Rodriguez, 2010. "Foreign exchange intervention and exchange rate volatility in Peru," Applied Economics Letters, Taylor & Francis Journals, vol. 17(15), pages 1485-1491.
  19. Javier Reyes, 2007. "Exchange Rate Passthrough Effects and Inflation Targeting in Emerging Economies: What is the Relationship?," Review of International Economics, Wiley Blackwell, vol. 15(3), pages 538-559, 08.
  20. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  21. van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001.
  22. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010. "Currency Choice and Exchange Rate Pass-Through," American Economic Review, American Economic Association, vol. 100(1), pages 304-36, March.
  23. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  24. Castillo, Paul & Montoro, Carlos & Tuesta, Vicente, 2009. "Un modelo de equilibrio general con dolarización para la economía peruana," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 17, pages 9-50.
  25. Vega, Marco & Bigio, Saki & Florian, David & Llosa, Gonzalo & Miller, Shirley & Ramirez-Rondan, Nelson & Rodriguez, Donita & Salas, Jorge & Winkelried, Diego, 2009. "Un modelo semiestructural de proyección para la economía peruana," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 17, pages 51-83.
  26. Frederic S. Mishkin, 2008. "Exchange Rate Pass-Through And Monetary Policy," NBER Working Papers 13889, National Bureau of Economic Research, Inc.
  27. Ball, Christopher P. & Reyes, Javier, 2008. "Inflation targeting or fear of floating in disguise? A broader perspective," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 308-326, March.
  28. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.).
  29. Paúl Castillo & Alberto Humala & Vicente Tuesta, 2012. "Regime shifts and inflation uncertainty in Peru," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 71-87, May.
  30. Gianluca Benigno & Pierpaolo Benigno & Fabio Ghironi, 2000. "Interest Rate Rules for Fixed Exchange Rate Regimes," Boston College Working Papers in Economics 468, Boston College Department of Economics, revised 13 Oct 2003.
  31. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  32. Miller, Shirley, 2003. "Estimación del pass-through del tipo de cambio a precios: 1995-2002," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 10.
  33. Joseph E. Gagnon & Jane Ihrig, 2004. "Monetary policy and exchange rate pass-through This article is a U.S. Government work and is in the public domain in the U.S.A," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 315-338.
  34. Rossini, Renzo & Vega, Marco, 2007. "El mecanismo de transmisión de la política monetaria en un entorno de dolarización financiera: El caso del Perú entre 1996 y 2006," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 14, pages 11-32.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Winkelried, Diego, 2012. "Traspaso del tipo de cambio y metas de inflación en el Perú," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 23, pages 9-24.
  2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pcp:pucwps:wp00314. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.