State-Dependent Exchange Rate Pass-Through Behavior
46 Pages Posted: 20 Jan 2015 Last revised: 16 Oct 2015
Date Written: October 14, 2015
We estimate a Bayesian threshold vector autoregression (TVAR) to study the relationship between exchange rate pass-through and economic activity in Canada and Mexico. Both the model comparison and the analysis of impulse-response functions provide strong evidence of a nonlinear relationship and suggest that the exchange rate pass-through is dependent on the state of the economy. In particular, the pass-through coefficient is higher when the growth rate of output is large and this difference is statistically significant across regimes for both countries. Furthermore, the results show that the degree of pass-through is complete in the case of import prices and that it falls along the distribution chain of goods.
Keywords: exchange rate pass-through, Bayesian Analysis, threshold process, Vector Autoregression, MCMC methods
JEL Classification: C11, C32, E31, F31
Suggested Citation: Suggested Citation