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The pass-through effect of the nominal exchange rate to prices in Costa Rica

Author

Listed:
  • Fabio Gómez-Rodríguez

    (Department of Economic Research, Central Bank of Costa Rica)

  • Catalina Sandoval-Alvarado

    (Department of Economic Research, Central Bank of Costa Rica)

Abstract

This study proposes a structural model to estimate the exchange rate pass-through to prices in Costa Rica, extending the traditional focus on unexpected exchange rate shocks by considering the inflation response to general fluctuations in the nominal exchange rate. It also reviews the main previous estimates for the country, highlighting their contributions and methodological limitations. The analysis yields three key findings: (i) existing approaches tend to underestimate the influence of the nominal exchange rate on prices; (ii) recursive identification schemes such as the Cholesky decomposition impose theoretically questionable assumptions; and (iii) the systematic pass-through exhibits a semi-elasticity of 25 %, significantly higher than the 4 % associated with the unconditional pass-through. Moreover, the study shows that pass-through effects conditional on monetary policy have a substantial impact on inflation, underscoring the importance of explicitly incorporating policy responses in the analysis. ***Resumen: Este estudio propone un modelo estructural para estimar el efecto de traspaso (ET) del tipo de cambio nominal (TCN) a precios en Costa Rica. El modelo permite estimar tres medidas complementarias del efecto traspaso. El ET incondicional representa la respuesta de la inflación a choques inesperados del TCN. El ET condicional recoge el efecto en inflación de choques del TCN inducidos por otros factores. Adicionalmente, se estima el ET sistemático que recoge la respuesta de la inflación ante fluctuaciones generales del TCN. También se revisan las principales estimaciones previas para el país, destacando sus aportes y limitaciones. El análisis ofrece tres conclusiones clave: (i) los enfoques existentes tienden a subestimar la influencia del tipo de cambio en los precios; (ii) la identificación recursiva tipo Cholesky impone supuestos teóricamente cuestionables; y (iii) el traspaso sistemático alcanza una semielasticidad del 25 %, muy superior al 4 % del traspaso incondicional. Además, se demuestra que los efectos de traspaso condicionados a la política monetaria tienen un impacto relevante sobre la inflación, resaltando la necesidad de incorporar explícitamente estas respuestas en el análisis.

Suggested Citation

  • Fabio Gómez-Rodríguez & Catalina Sandoval-Alvarado, 2025. "The pass-through effect of the nominal exchange rate to prices in Costa Rica," Documentos de Trabajo 2503, Banco Central de Costa Rica.
    • Handle: RePEc:apk:doctra:2503
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    File URL: https://repositorioinvestigaciones.bccr.fi.cr/handle/20.500.12506/506
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    References listed on IDEAS

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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