Nonlinear State and Shock Dependence of Exchange Rate Pass Through on Prices

55 Pages Posted: 25 Jan 2018

Date Written: January 2018

Abstract

This paper examines the nature of the pass-through of exchange rate shocks on prices along the distribution chain, and estimates its short and long-term path. It uses monthly data from a small open economy and a smooth transition auto-regressive vector model estimated by Bayesian methods. The main finding is that exchange rate pass-through is nonlinear and state and shock dependent. There are two main policy implications of these findings. First, models used by central banks for policymaking should take into account the nonlinear and endogenous nature of the pass-through. Second, a specific rule on pass-through for monetary policy decisions should be avoided.

Keywords: Exchange rate pass-through to prices, pricing along the distribution chain, statedependent, shock-dependent, LST-VAR, Bayesian estimation

JEL Classification: F31, E31, E52, C51, C52

Suggested Citation

Rincón, Hernán and Rodriguez-Nino, Norberto, Nonlinear State and Shock Dependence of Exchange Rate Pass Through on Prices (January 2018). BIS Working Paper No. 690. Available at SSRN: https://ssrn.com/abstract=3106493

Hernán Rincón (Contact Author)

Banco de la República ( email )

Carrera 7 No. 14-78, Piso 11
Bogota, Cundinamarca 111711
Colombia
+571 343 1164 (Phone)
+571 342 1804 (Fax)

Norberto Rodriguez-Nino

Banco de la República

Bogota
Colombia

Register to save articles to
your library

Register

Paper statistics

Downloads
27
Abstract Views
134
PlumX Metrics