An Analysis of the Exchange Rate Pass-Through: Nonlinearity and Asymmetry in Mexico and Peru

What is the impact of an exchange rate change on the consumer price level? Can we expect a similar (but opposite) effect of a depreciation compared to an appreciation? Is this effect non-linear? The techniques and results used to answer these questions have assumed that the Pass-Through at the exchange rate is linear and, therefore, they have estimated it that way. This document proposes an analysis of the non-linearity of the pass-through for Mexico and Peru, two countries that reduced inflation to one-digit figures at the onset of the new millennium, and adopted inflation targeting since then. Using the technique of local projections, the pass-through is computed in different contexts to perform non-linearity and asymmetry tests. The results suggest that the effect has been greater in Peru than in Mexico, in addition to a clear evidence of non-linearity and asymmetric effects of the parameter in both countries. (Audio: Department of Economic Publications)