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Asymmetric Exchange Rate Pass-through: Evidence from Nonlinear SVARs

Author

Listed:
  • Fernando J. Pérez Forero

    (Central Reserve Bank of Peru)

  • Marco Vega

    (Central Reserve Bank of Peru)

Abstract

We study the response of headline inflation to exchange rate innovations in a nonlinear context, where we distinguish between positive (depreciation) and negative (appreciation) exchange rate shocks. For that purpose, we specify a nonlinear Structural Vector Autoregressive (SVAR) model and we compute asymmetric impulse response functions for headline inflation after exchange rate innovations. We introduce a bootstrap Monte Carlo routine that allows to compute the error bands for these nonlinear impulse responses. Results for the Peruvian economy exhibit a remarkable statistically significant asymmetry in the response of headline inflation, both on impact and on propagation. In absolute values, the effect of a depreciation shock after one year is about twice the size of that corresponding to an appreciation shock. Roughly speaking, the one-year exchange rate pass-through to prices is 20 percent under a depreciation and only 10 percent under an appreciation.

Suggested Citation

  • Fernando J. Pérez Forero & Marco Vega, 2016. "Asymmetric Exchange Rate Pass-through: Evidence from Nonlinear SVARs," Working Papers 2016-63, Peruvian Economic Association.
  • Handle: RePEc:apc:wpaper:2016-063
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Exchange rate pass-through; asymmetric impulse responses; non-linear SVARs; Bootstrap; Monte Carlo;

    JEL classification:

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

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