Exchange rate pass-through and inflation targets in Peru

A widely documented phenomenon is the decline in the pass-through of exchange rate changes to inflation in most industrialized countries and in some emerging economies. One macroeconomic explanation that has gained popularity in accounting for this pattern is that a low and stable inflation rate leads to a decline in the pass-through effect. Through the analysis of a structural VAR model, this article presents evidence of a similar reduction in the pass-through effect in Peru in the early 2000s. It argues that the adoption of a credible low-inflation regime has been fundamental in reducing exchange rate pass-through. (Audio: Department of Economic Publications)