Analyzing the Exchange Rate Pass-Through in Mexico: Evidence Post Inflation Targeting Implementation

Ensayos sobre Política Económica 32 (74) 18-35, 2014

Posted: 29 Jan 2015

Date Written: May 27, 2014

Abstract

This paper presents an analysis of the exchange rate pass-through mechanism for the Mexican economy after the formal adoption of inflation targeting policy. In particular, this research work analyzes how a change in the nominal exchange rate depreciation is transmitted to domestic prices along the distribution chain of pricing. The analysis is carried out using a recursive Structural Vector Autorregression with exogenous variables (recursive SVAR-X) model, which aims at the estimation of structural impulse-response-functions as a tool to analyze the degree and speed of the effect of exchange rate depreciation changes on domestic prices. Additionally, variance decompositions are computed to capture the relative importance of exchange rate depreciation shocks in explaining inflation fluctuations. Our results show that, for the period of analysis (after the formal adoption of inflation targeting in Mexico), the exchange rate pass-through to consumer prices is quite small and fast and exchange rate surprises are not relevant to explain consumer price inflation variation.

Keywords: Exchange rate pass-through in Mexico, Structural VAR-X models, Impulse-response functions

JEL Classification: E31, F31, F41, C32

Suggested Citation

Rodríguez Brindis, Martín, Analyzing the Exchange Rate Pass-Through in Mexico: Evidence Post Inflation Targeting Implementation (May 27, 2014). Ensayos sobre Política Económica 32 (74) 18-35, 2014, Available at SSRN: https://ssrn.com/abstract=2556573

Martín Rodríguez Brindis (Contact Author)

Universidad Anáhuac Oaxaca (UA) ( email )

Boulevard Guadalupe Hinojosa de Murat
1100 Cuilapan de Guerrero
71240
Mexico

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