The Pass-Through from Depreciation to Inflation: A Panel Study

Banco Central de Brasil Working Paper No. 5

44 Pages Posted: 14 Nov 2000  

Ilan Goldfajn

Gávea Investimentos; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Central Bank of Brazil

Sergio R. da C. Werlang

Government of the Federative Republic of Brazil - Studies and Research Department

Date Written: July 2000

Abstract

The paper studies the relationship between exchange rate depreciations and inflation using a sample of 71 countries in the period 1980-1998. The main determinants of the extent of inflationary pass-through of the depreciations (appreciations) are the cyclical component of output, the extent of initial overvaluation of the real exchange rate (RER), the initial rate of inflation, and the degree of openness of the economy. The paper finds that the pass-through coefficients increase the larger is the horizon measured, with its peak at 12-months. It also finds that RER misalignment is the most important determinant of inflation for emerging markets while the initial inflation is the most important variable for developed countries. Using the estimated model, the paper predicts somewhat higher inflation than actually observed in several well known large depreciation cases, even if one takes into account existing measures of exchange rate expectations. This suggests that policy makers should use caution when using past models to predict future inflation in the aftermath of large depreciations.

Keywords: passthrough, real exchange rate, devaluations

JEL Classification: E31, F31

Suggested Citation

Goldfajn, Ilan and Werlang, Sergio R. da C., The Pass-Through from Depreciation to Inflation: A Panel Study (July 2000). Banco Central de Brasil Working Paper No. 5. Available at SSRN: https://ssrn.com/abstract=224277 or http://dx.doi.org/10.2139/ssrn.224277

Ilan Goldfajn (Contact Author)

Gávea Investimentos ( email )

Rua Dias Ferreira, 190 7th andar
22431-050 Rio de Janeiro
Brazil

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia DF 70074-900, Distr. Federal 70074-900
Brazil
61-4143232 (Phone)
61-2260767 (Fax)

Sergio R. Da C. Werlang

Government of the Federative Republic of Brazil - Studies and Research Department ( email )

SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70.000-000 DF 70074
Brazil
61-4143232 (Phone)
61-2260767 (Fax)

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