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Pass-through from exchange rate to prices in Brazil:an analysis using time-varying parameters for the 1980 – 2002 period

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  • Christiane R. Albuquerque; Marcelo S. Portugal

Abstract

The aim of the present paper is to analyze the pass-through from exchange rate to inflation in Brazil from 1980 to 2002. Initially, we developed a model of a profit-maximizing firm based on the pricing-to-market approach presented by FEENSTRA and KENDAL (1997). In order to adapt the model to the Brazilian reality, we considered the following aspects: (i) the firm sells its product both in the domestic market – where it has some pricing power – and in the foreign market – where it is a price-taker; (ii) costs are a function of the exchange rate; (iii) the degree of openness is included in the demand equation. Results show that the Kalman Filter yields better results than linear models with time-invariant parameters and that the inflationary environment and the exchange rate regime perceived by the agents affect the degree of pass-through. We can observe a reduction in the pass-through to consumer price indices (IPCA and IGP-DI) after the implementation of the Real plan, and a more intense reduction after the adoption of the floating exchange rate regime in 1999. These results are in line with other estimates presented in the literature. The pass-through to wholesale prices, however, is relatively constant and its levels are close to one throughout the period. This also seems to be a consistent result if we consider a small (price-taking) economy in the foreign market

Suggested Citation

  • Christiane R. Albuquerque; Marcelo S. Portugal, 2004. "Pass-through from exchange rate to prices in Brazil:an analysis using time-varying parameters for the 1980 – 2002 period," Econometric Society 2004 Latin American Meetings 166, Econometric Society.
  • Handle: RePEc:ecm:latm04:166
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    Keywords

    exchange rate; pass-through; Kalman filter;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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