Is the pass-through asymmetric in Peru?: an aggregate analysis

This article examines the asymmetry in the exchange rate pass-through (PT) to inflation in Peru, a phenomenon crucial to understanding monetary policy in open economies. The research focuses on the relationship between exchange rate depreciation and the price level, considering how various macroeconomic factors impact this dynamic. Using a vector autoregression (VAR) model for monthly data from 1993 to 2002, the study incorporates nonlinearities and asymmetric effects, revealing that the PT tends to be higher in contexts of sharp depreciations and during economic expansions. The results show that a sharp depreciation can generate a long-run price trend of up to 36%, while during recessions this effect is drastically reduced. In addition, the study establishes that price stability and the credibility of the Central Bank are critical determinants of the magnitude and speed of price transmission. These findings suggest that monetary policy design in Peru should take into account the nonlinearity of the PT to improve its inflation forecasts. (Abstract and audio: Department of Economic Publications)