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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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