Exchange rate and inflation: a neo-structuralist approach for Brazilian manufacturing sectors (2010–2019)

The objective of this article is twofold. The first goal is to comprehend the effect of changes in the exchange rate on prices using a neo-structuralist approach. Our theoretical model showed that the greater the share of imported inputs in costs, the more powerful the pass-through. Furthermore, considering the structuralist notion of neutral inflation, the model also indicated that the exchange rate pass-through of sectors with a small (great) share of salaries in costs is less (more) sensitive to salary changes. Also, the model was extended to endogenize the exchange rate pass-through on prices in relation to the effects of a regime of real exchange rate oriented to economic development on the markup rate and the productive structure. The second goal of the article is to provide time-series evidence on the exchange rate pass-through in prices across different manufacturing sectors of the Brazilian economy over the 2010–2019 period. Empirical results delivered evidence that pass-through is partial and varies across sectors. Moreover, the empirical findings confirmed our theoretical results insofar as sectoral differences of pass-through are associated with the markup rate, the degree of outward orientation, the competition between firms, and the share of imported inputs of each sector.