Exchange Rate Pass-Through and its evolution in Peru: Evidence from a Bayesian Time-Varying Parameter VAR

This paper analyzes the evolution of exchange rate pass-through to prices between 1996 and 2024. To do so, it proposes an identification strategy that has been little explored in this branch of the literature, within the framework of a Bayesian VAR with stochastic volatility and time-varying parameters (TVP-SV-BVAR). Two instrumental variables exogenous to the Peruvian economy, the DXY and VIX indices, are used to identify exogenous exchange rate shocks. This alternative approach allows for obtaining causally identified estimates of pass-through and documenting its evolution over time. The results indicate that pass-through is around 40 percent to import price inflation, 30 percent to producer price inflation, and 10 percent to consumer price inflation. Furthermore, a decline in exchange rate pass-through is observed over the sample period for all three measures of inflation, especially during the first years of the sample.