Exchange Rate Pass-through in South America: An Overview

Eduardo Borensztein and Virginia Queijo Von Heideken

No 7779, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: The effectiveness of exchange rate adjustments depends critically on the extent to which depreciations "pass through" to inflation, an effect that is known as exchange rate pass-through (ERPT). In particular, if an exchange rate depreciation does not result in a lasting change in relative prices, namely a real depreciation, it will not provide the desirable competitiveness gains. This paper looks at the question of pass-through and its determinants for the group of countries whose central banks are members of the Financial Stability and Development (FSD) network. All of these countries experienced large terms of trade shocks and large depreciations in the past couple of years. The findings are that ERPT in the FSD countries is moderate and has become lower over time, in line with the international experience. The pass-through moderation has benefitted from the adoption of floating exchange rates and especially an increase in monetary policy credibility. Despite the relatively lower ERPT in the past two decades, the exchange rate continues to be a large determinant of inflation in several countries.

JEL-codes: E31 E44 E50 F31 F41 (search for similar items in EconPapers)
Date: 2016-07
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:7779

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