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Nonlinear Mechanisms of the Exchange Rate Pass-Through: a Phillips curve model with threshold for Brazil

  • Arnildo da Silva Correa
  • André Minella

This paper investigates the presence of nonlinear mechanisms of pass-through from the exchange rate to inflation in Brazil. In particular, it estimates a Phillips curve with a threshold for the pass-through. The paper examines whether the short-run magnitude of the pass-through is affected by the business cycle, direction and magnitude of exchange rate changes, and exchange rate volatility. The results indicate that the short-run pass-through is higher when the economy is growing faster, when the exchange rate depreciates above some threshold and when exchange rate volatility is lower. These results have important implications for monetary policy and are possibly related to pricing-to-market behavior, menu costs of price adjustment and uncertainty about the degree of persistence in exchange rate movements.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps122.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 122.

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Date of creation: Nov 2006
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Handle: RePEc:bcb:wpaper:122
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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  1. Arnildo da Silva Correa, 2003. "Diferenças e Semelhanças entre Países da América Latina: Uma Análise de Markov Switching para os Ciclos Econômicos de Brasil e Argentina," Working Papers Series 80, Central Bank of Brazil, Research Department.
  2. Sergio A. L. Alves & Waldyr D. Areosa, 2005. "Targets and Inflation Dynamics," Working Papers Series 100, Central Bank of Brazil, Research Department.
  3. Márcio I. Nakane & Leonardo S. Alencar & Fabio Kanczuk, 2006. "Demand for Bank Services and Market Power in Brazilian Banking," Working Papers Series 107, Central Bank of Brazil, Research Department.
  4. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
  5. Eui Jung Chang & Marcelo Kfoury Muinhos & Joanílio Rodolpho Teixeira, 2002. "Macroeconomic Coordination and Inflation Targeting in a Two-Country Model," Working Papers Series 50, Central Bank of Brazil, Research Department.
  6. Eduardo A. S. Rodrigues & Victorio Chu & Leonardo S. Alencar & Tony Takeda, 2006. "O Efeito da Consignação em Folha nas Taxas de Juros dos Empréstimos Pessoais," Working Papers Series 108, Central Bank of Brazil, Research Department.
  7. Ryan A. Compton & Jose Ricardo da Costa e Silva, 2005. "Finance and the Business Cycle: a Kalman Filter Approach with Markov Switching," Working Papers Series 97, Central Bank of Brazil, Research Department.
  8. Marcelo Kfoury Muinhos & Sergio Afonso Lago Alves, 2003. "Medium-Size Macroeconomic Model for the Brazilian Economy," Working Papers Series 64, Central Bank of Brazil, Research Department.
  9. Aloisio Araujo & Marcia Leon, 2004. "Speculative Attacks on Debts and Optimum Currency Area: A Welfare Analysis," Working Papers Series 84, Central Bank of Brazil, Research Department.
  10. Alan Cosme Rodrigues da Silva & João Maurício de Souza Moreira & Myriam Beatriz Eiras das Neves, 2006. "Avaliação de Modelos de Exigência de Capital para Risco de Mercado do Cupom Cambial," Working Papers Series 111, Central Bank of Brazil, Research Department.
  11. Eduardo J. A. Lima & Felipe Luduvice & Benjamin M. Tabak, 2006. "Forecasting Interest Rates: an application for Brazil," Working Papers Series 120, Central Bank of Brazil, Research Department.
  12. Alves, Sergio A Lago & Bugarin, Mirta N S, 2006. "The Role of Consumer's Risk Aversion on Price Rigidity," Computing in Economics and Finance 2006 128, Society for Computational Economics.
  13. Ricardo Schechtman, 2006. "A Central de Risco de Crédito no Brasil: uma análise de utilidade de informação," Working Papers Series 119, Central Bank of Brazil, Research Department.
  14. Eduardo Lundberg, 2000. "Monetary Policy and Banking Supervision Functions on the Central Bank," Working Papers Series 2, Central Bank of Brazil, Research Department.
  15. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
  16. José Fajardo & Aquiles Farias, 2002. "Generalized Hyperbolic Distributions and Brazilian Data," Working Papers Series 52, Central Bank of Brazil, Research Department.
  17. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
  18. Marcelo Kfoury Muinhos & Sérgio Afonso Lago Alves & Gil Riella, 2002. "Modelo Estrutural com Setor Externo: Endogenização do Prêmio de Risco e do Câmbio," Working Papers Series 42, Central Bank of Brazil, Research Department.
  19. Pedro H. Albuquerque, 2000. "An Information Theory Approach to the Aggregation of Log-Linear Models," Working Papers Series 4, Central Bank of Brazil, Research Department.
  20. Marta Areosa & Waldyr Areosa, 2006. "The Inequality Channel of Monetary Transmission," Working Papers Series 114, Central Bank of Brazil, Research Department.
  21. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
  22. Caner, Mehmet, 2002. "A Note On Least Absolute Deviation Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 18(03), pages 800-814, June.
  23. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series 109, Central Bank of Brazil, Research Department.
  24. Francisco Marcos R. Figueiredo & Thaís Porto Ferreira, 2002. "Os Preços Administrados e a Inflação no Brasil," Working Papers Series 59, Central Bank of Brazil, Research Department.
  25. Ricardo Schechtman & Valéria Salomão Garcia & Sergio Mikio Koyama & Guilherme Cronemberger Parente, 2004. "Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil - A Corporate Analysis," Working Papers Series 91, Central Bank of Brazil, Research Department.
  26. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
  27. Laxton, Douglas & Rose, David & Tambakis, Demosthenes, 1999. "The U.S. Phillips curve: The case for asymmetry," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1459-1485, September.
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