Estimation of the exchange rate pass-through to prices: 1995–2002

This article examines the pass-through of the exchange rate to prices in the context of the Peruvian economy, covering the period from 1995 to 2002, a time characterized by moderate and low inflation. The main research question is how changes in the exchange rate affect consumer prices, taking into account the structure of the domestic market. The study contributes to the literature by estimating the elasticity of the pass-through using the vector autoregression (VAR) methodology, analyzing the effects of the exchange rate on different price levels, including imported, wholesale, and consumer prices. It is found that the pass-through elasticity to import prices is significantly high (0.90 in the short run), while the impact on consumer prices is much lower (only 0.16 in the long run). This suggests that producers absorb part of the shock through profit margins. The implications for monetary policy highlight the need to carefully manage the exchange rate to protect price stability under an inflation-targeting framework. (Abstract and audio: Department of Economic Publications)