Asymmetries and Non-linearities in the Exchange Rate Pass-Through to Inflation – Evidence for Peru

This paper examines the impact of exchange rate variations on the consumer price inflation in Peru, i.e. the exchange rate pass-through effect to prices (ERPT), emphasizing the inherent nonlinearities of this process, such as the differences between depreciations and appreciations, and also exploring the differences associated with the magnitude of the shocks. The ERPT is not necessarily constant over time, so it is necessary to identify the source of the temporal variation. This leads to the consideration of different models: i) A Linear Bayesian Structural VAR, ii) A non-linear censored SVAR, iii) A time varying coefficients SVAR with Stochastic Volatility, and iv) A Threshold Bayesian SVAR with volatility feedback. In all the models mentioned, an exchange rate shock is identified, and the dynamic effect that this has on measures of total inflation is examined. We find strong evidence of asymmetries and non-linearities in the ERPT, with a time varying effect that fluctuates between 0.1 and 0.3 over 12 months, but can be potentially higher in more uncertain and volatile episodes.