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In Search of the Lost Exchange Rate Pass-Through in Mexico

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Abstract

Exchange rate pass-through (ERPT) is a key channel through which external shocks affect domestic inflation in open emerging market economies (EMEs). This paper estimates ERPT for Mexico using local projections with an instrumental-variable strategy to trace the cumulative effects of peso-dollar depreciations on consumer prices. The results indicate a relatively high degree of pass-through–higher than most estimates reported in the existing literature–suggesting that Mexican inflation responds more strongly to exchangerate movements than commonly assumed. Although price subcomponents display the expected heterogeneity (with goods showing the highest sensitivity and services the lowest), the main implication is clear: exchange-rate fluctuations remain a powerful driver of inflation dynamics, underscoring the policy relevance of monitoring currency volatility in open EMEs such as Mexico.

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  • Samuel Martinez & Daniel Ventosa-Santaulària, 2025. "In Search of the Lost Exchange Rate Pass-Through in Mexico," AMSE Working Papers 2536, Aix-Marseille School of Economics, France.
    • Handle: RePEc:aim:wpaimx:2536
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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