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Analyzing the Exchange Rate Pass-through in Mexico: Evidence Post Inflation Targeting Implementation

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  • Sylvia Beatriz Guillermo Peón

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  • Martín Alberto Rodríguez Brindis

Abstract

This paper presents an analysis of the exchange rate pass-through mechanism for the Mexican economy after the formal adoption of inflation targeting policy. In particular, this research work analyzes how a change in the nominal exchange rate depreciation is transmitted to domestic prices along the distribution chain of pricing. The analysis is carried out using a recursive Structural Vector Autorregression with exogenous variables (recursive SVAR-X) model, which aims at the estimation of structural impulse-response-functions as a tool to analyze the degree and speed of the effect of exchange rate depreciation changes on domestic prices. Additionally, variance decompositions are computed to capture the relative importance of exchange rate depreciation shocks in explaining inflation fluctuations. Our results show that, for the period of analysis (after the formal adoption of inflation targeting in Mexico), the exchange rate pass-through to consumer prices is quite small and fast and exchange rate surprises are not relevant to explain consumer price inflation variation. ****** Este trabajo de investigación presenta un análisis del mecanismo de traspaso de movimientos del tipo de cambio para la economía mexicana después de la implementación formal de la política de objetivos de inflación. En particular, este trabajo de investigación analiza cómo un cambio en la tasa de depreciación del tipo de cambio nominal se transmite a los precios locales a lo largo de la cadena de precios. El análisis se lleva a cabo utilizando un modelo VAR estructural recursivo con una variable exógena (SVAR-X), cuyo objetivo es la estimación de las funciones impulso-respuesta estructurales como una herramienta para analizar el grado y la rapidez de los efectos en los precios por los cambios en la depreciación del tipo de cambio. Además, la descomposición de varianzas se lleva a cabo para captar la importancia que los choques en la depreciación del tipo de cambio tienen en las fluctuaciones de la tasa de inflación. Nuestros resultados muestran que, para el periodo de análisis (después de la adopción de la política de objetivos de inflación en México), el traspaso del tipo de cambio a los precios del consumidor es muy pequeño y rápido y que las sorpresas en el tipo de cambio no son relevantes para explicar la variación de la inflación en precios al consumidor.

Suggested Citation

  • Sylvia Beatriz Guillermo Peón & Martín Alberto Rodríguez Brindis, 2014. "Analyzing the Exchange Rate Pass-through in Mexico: Evidence Post Inflation Targeting Implementation," Revista ESPE - ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 32(74), pages 18-35, June.
  • Handle: RePEc:col:000107:012394
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    References listed on IDEAS

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    Cited by:

    1. Juan Hernández, 2015. "Revisión de algunas estimaciones recientes del traspaso del tipo de cambio a los precios en México," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 33(78), pages 190-196, December.
    2. Cengiz TUNC & Mustafa Kilinc, 2018. "Exchange Rate Pass‐Through In A Small Open Economy: A Structural Var Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 70(4), pages 410-422, October.

    More about this item

    Keywords

    Exchange rate pass-through in Mexico; Structural VAR-X models; Impulse-response functions;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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