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Exchange Rate Pass-Through in Brazil: a Markov switching estimation for the inflation targeting period (2000-2015)

Author

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  • Fabrizio Almeida Marodin
  • Marcelo Savino Portugal

Abstract

This paper investigates the nonlinearity of exchange rate pass-through in the Brazilian economy during the floating exchange rate period (2000-2015) using a Markov-switching semi-structural new Keynesian model. We apply the methods proposed by Baele et al. (2015) and a basic new Keynesian model, with the addition of new elements to the AS curve and a new equation for the exchange rate dynamics. We find evidence of two distinct regimes for the exchange rate pass-through and for the volatility of shocks to inflation. Under the so-called “normal” regime, the long-run pass-through to consumer prices inflation is estimated at near zero value, only 0.00057 percentage point given a 1% exchange rate shock. Comparatively, the expected pass-through under a “crisis” regime is of 0.1035 percentage point to inflation, for the same exchange rate shock. The Markov-switching (MS) model outperforms the fixed parameters model according to several comparison criteria. The results allowed us to identify the occurrence of three distinct cycles for the exchange rate pass-through during the inflation targeting period in Brazil.

Suggested Citation

  • Fabrizio Almeida Marodin & Marcelo Savino Portugal, 2018. "Exchange Rate Pass-Through in Brazil: a Markov switching estimation for the inflation targeting period (2000-2015)," Working Papers Series 473, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:473
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    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps473.pdf
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    Cited by:

    1. Abbas, Syed Kanwar & Lan, Hao, 2020. "Commodity price pass-through and inflation regimes," Energy Economics, Elsevier, vol. 92(C).
    2. Ibrahim L. Awad, 2019. "Revisiting the Exchange Rate Pass-Through to Domestic Inflation in Egypt: Why Is the Statistical Association Weak in the Short Run?," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(1), pages 59-78, June.
    3. Weider Loureto Alves & Roberto Tatiwa Ferreira, 2023. "Phillips curve and the exchange rate pass-through: a time–frequency approach," Empirical Economics, Springer, vol. 64(5), pages 2165-2181, May.
    4. Ibrahim L. Awad, 2019. "Revisiting the Exchange Rate Pass-Through to Domestic Inflation in Egypt: Why Is the Statistical Association Weak in the Short Run?," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(1), pages 59-77, June.

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