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Estimating the Exchange Rate Pass-Through: A Time-Varying Vector Auto-Regression with Residual Stochastic Volatility Approach

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  • Juan Manuel Julio-Román

    () (Banco de la República de Colombia)

Abstract

The adoption of a Time-Varying Vector Auto-Regression with residual Stochastic Volatility approach to address the state and time dependency of the exchange rate pass-through, ERPT, is proposed. This procedure is employed to estimate the size, duration and stability of the ERPT to flexible relative price changes in Colombia through a fairly simple Phillips curve. For this, the generalized impulse responses, i.e. pass-throughs, from different periods of time are compared. It was found that the ERPT is bigger and faster than previous estimates for broader price indexes. It was also also found that regardless of the existence of time-varying shock sizes, i.e. time varying standard deviations, the ERPT before full Inflation Targeting, IT, is marked and significantly larger before than during full IT, and also that the ERPT relates to real exchange rate volatility. The second results relates to the benefits derived from the adoption of full IT in this country. It was finally found that the output gap and flexible relative price change residual volatilities drop permanently and importantly at 1998Q3, emphasizing the role of the free float regime adoption in the success of IT in this country. **** RESUMEN: La adopción de un enfoque de Vectores Auto-Regresivos Tiempo-Variantes con Volatilidad Estocástica residual para examinar la variación temporal y sobre el estado de la economía del Traspaso de la Tasa de Cambio, TCC, es propuesta. Este enfoque es empleado para estimar el tamaño, duración y estabilidad del TTC a los cambios de los precios relativos de los flexibles en Colombia a través de una curva de Phillips relativamente simple. Para esto, las funciones de impulso respuesta generalizadas, es decir los TTC, de diferentes periodos de tiempo son comparados. Se encontró que el TTC es más grande y rápido que estimaciones anteriores para agregados más amplios de precios. Se encontró también que a pesar del tamaño tiempo-variante de los choques, es decir las desviaciones estándar, el traspaso antes del Esquema completo de Inflación Objetivo, EIO, es marcada y significativamente más grande que el traspaso durante este, y también se halló evidencia de una relación entre el traspaso y la volatilidad de la tasa de cambio real. El segundo resultado se relaciona con los beneficios derivados de la adopción del esquema de inflación objetivo en este país. Se encontró, finalmente, que la volatilidad residual de la brecha del PIB y del cambio de los precios relativos de los flexibles cayó substancial y permanentemente en 1998Q3, enfatizando el papel del régimen de libre flotación en el éxito del EIO en este país.

Suggested Citation

  • Juan Manuel Julio-Román, 2019. "Estimating the Exchange Rate Pass-Through: A Time-Varying Vector Auto-Regression with Residual Stochastic Volatility Approach," Borradores de Economia 1093, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:1093
    DOI: 10.32468/be.1093.pdf?sequence=11&isAllowed=y
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    File URL: https://doi.org/10.32468/be.1093
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    More about this item

    Keywords

    Pass-Through; Price Stickiness; Phillips Curve; Traspaso de la Tasa de Cambio; Rigideces de Precios; Curva de Phillips.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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