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Exchange rate pass-through and inflation targeting in Peru

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  • Diego Winkelried

Abstract

It has been widely documented that the exchange rate pass-through to domestic inflation has decreased significantly in most of the industrialized world. As microeconomic factors cannot completely explain such a widespread phenomenon, a macroeconomic explanation linked to the inflationary environment—that a low and more stable inflation rate leads to a decrease in the pass-through—has gained popularity. Using a structural VAR framework, this paper presents evidence of a similar decline in the pass-through in Peru, a small open economy that gradually reduced inflation to international levels in order to adopt a fully fledged inflation targeting scheme in 2002. It is argued that the establishment of a credible regime of low inflation has been instrumental in driving the exchange rate pass-through down. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Diego Winkelried, 2014. "Exchange rate pass-through and inflation targeting in Peru," Empirical Economics, Springer, vol. 46(4), pages 1181-1196, June.
    • Handle: RePEc:spr:empeco:v:46:y:2014:i:4:p:1181-1196
    DOI: 10.1007/s00181-013-0715-4
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    More about this item

    Keywords

    Exchange rate pass-through; Inflation targeting; Structural VAR;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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