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 general level of consumer prices? Could one expect a similar effect (but of the opposite sign) from a depreciation compared to an appreciation? Is this effect nonlinear? The techniques and results used to answer these questions have assumed that the pass-through to the exchange rate is linear and, therefore, have estimated it as such. This paper presents an analysis of the nonlinearity of the pass-through for Mexico and Peru, two countries that reduced inflation to single digits beginning in the new millennium and adopted inflation-targeting policies starting in 2002. Using the local projection technique, the pass-through is estimated in different contexts to test for nonlinearity and asymmetry. The results suggest that the effect has been greater in Peru than in Mexico, in addition to clear evidence of nonlinearity and asymmetric effects of the parameter in both countries.