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Exchange Rate Pass-Through Conditional on Shocks and Monetary Policy Credibility. The Case of Uruguay

Author

Listed:
  • Fernanda Cuitiño

    (Banco Central del Uruguay)

  • Juan Pablo Medina

    (Business School, Universidad Adolfo Ibáñez, Chile)

  • Laura Zacheo

    (Banco Central del Uruguay)

Abstract

The estimation of exchange rate pass-through (ERPT) is critical for understanding and forecasting the inflation dynamics in open economies. In this work, we estimate a medium scale New-Keynesian model for the Uruguayan economy to analyze the ERPT. We compute the ERPT with the estimated model conditional on specific external shocks and on whether the monetary policy has perfect or imperfect credibility. The results show that the empirical fit is better under imperfect credibility. The estimated degree of imperfect credibility is quite significant and it shows substantial variation across shocks and over time. We find that the ERPT tends to be lower for a shock that has a higher offsetting effect in aggregate demand and when monetary policy is more credible in keeping the inflation target constant. Finally, adding the exchange rate stabilization in the monetary policy rule in the case of Uruguay has a stronger empirical role once we allow for imperfect credibility.

Suggested Citation

  • Fernanda Cuitiño & Juan Pablo Medina & Laura Zacheo, 2021. "Exchange Rate Pass-Through Conditional on Shocks and Monetary Policy Credibility. The Case of Uruguay," Documentos de trabajo 2021008, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2021008
    as

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    References listed on IDEAS

    as
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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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