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Conditional exchange rate pass-through and monetary policy credibility: Insights from Uruguay and Chile

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  • Cuitiño, María Fernanda
  • Medina, Juan Pablo
  • Zacheo, Laura

Abstract

The exchange rate pass-through (ERPT) to local prices is critical for determining inflation dynamics and monetary policy. Different factors have been considered to explain the variation of the ERPT across time and countries. This paper aims to disentangle the role of shocks and monetary policy credibility on the ERPT, estimating medium-scale New Keynesian models for Uruguay and Chile that explicitly incorporate the possibility of imperfect credibility. The estimations show a significant degree of imperfect credibility in Uruguay and an important role for exchange rate stabilization in the monetary policy rule. Both aspects are interlinked and should be tackled together by the monetary authority in Uruguay. The estimated ERPT tends to be lower when the shock has an offsetting effect in aggregate demand and when monetary policy is more credible. Estimations for Chile stress that this country has well anchored inflation expectations and a very small degree of exchange rate stabilization.

Suggested Citation

  • Cuitiño, María Fernanda & Medina, Juan Pablo & Zacheo, Laura, 2022. "Conditional exchange rate pass-through and monetary policy credibility: Insights from Uruguay and Chile," Economic Modelling, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:ecmode:v:114:y:2022:i:c:s0264999322001729
    DOI: 10.1016/j.econmod.2022.105926
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    3. Didarul Islam & Mohammad Abdullah Al Faisal, 2024. "Determinants of Uruguay's Real Effective Exchange Rate: A Mundell-Fleming Model Approach," Papers 2403.16452, arXiv.org.
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    More about this item

    Keywords

    Exchange rate pass-through; Emerging economy; Imperfect credibility; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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