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The Pass-through from Depreciation to Inflation: Chile 1986-2001

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  • Carlos Noton

Abstract

A microeconomic model of imperfect Cournot competition is used to derive an explicit endogenous relationship between price level and the nominal exchange rate. We obtain a markup that varies endogenously with consumer real income. Using the model, the estimated passthrough - namely the impact of devaluation on inflation - ranges between 9-11% in the short run and between 21-32% in the long run for the period 1986-2001. However, the data supports a structural change in 1991, after which the pass-through coefficient decline significantly. Moreover, contrary to conventional wisdom, we find no evidence of procyclical pass-through.

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Bibliographic Info

Paper provided by University of Chile, Department of Economics in its series Working Papers with number wp202.

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Date of creation: Dec 2003
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Handle: RePEc:udc:wpaper:wp202

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Web page: http://www.econ.uchile.cl/
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Keywords: Exchange rate; Devaluation; Pass-through; Inflation; Endogenous Mark-up; Oligoplistic Cournot Competition.;

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  1. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  2. Campa, Jose M. & Goldberg, Linda S., 2002. "Exchange rate pass-through into import prices: A macro or micro phenomenon?," IESE Research Papers D/475, IESE Business School.
  3. Rudiger Dornbusch, 1985. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  5. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão 423, Department of Economics PUC-Rio (Brazil).
  6. Kikuchi, Ayumi & Sumner, Michael, 1997. "Exchange-rate pass-through in Japanese export pricing," Discussion Papers in Economics 06/97, Department of Economics, University of Sussex.
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Cited by:
  1. Roberto Álvarez & Patricio Jaramillo & Jorge Selaive, 2008. "Exchange Rate Pass-Through into Import Prices: The Case of Chile," Working Papers Central Bank of Chile 465, Central Bank of Chile.

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