Exchange Rate Pass-Through in Brazil: À Markov Switching DSGE Estimation for the Inflation Targeting Period

Fabrizio Almeida Marodin () and Marcelo Savino Portugal ()
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Fabrizio Almeida Marodin: University of California Irvine
Marcelo Savino Portugal: Universidade Federal do Rio Grande do Sul

Russian Journal of Money and Finance, 2019, vol. 78, issue 1, 36-66

Abstract: This paper investigates the nonlinearity of exchange rate pass-through in the Brazilian economy during the inflation targeting period (2000-2018) using a Markov-switching new Keynesian DSGE model. We find evidence of two distinct regimes for exchange rate pass-through and for the volatility of shocks to inflation. Under the so-called 'normal' regime, the long-run pass-through to consumer prices inflation is estimated as almost zero, only 0.00057 of a percentage point given a 1% exchange rate shock. In comprasion, the expected pass-through to inflation under a 'crisis' regime is 0.1035 of a percentage point, for the same exchange rate shock. These results allow us to identify four distinct cycles for exchange rate pass-through during the inflation targeting period in Brazil, and suggest that higher central bank credibility and anchored inflation expectations may be related to lower levels of pass-through.

Keywords: exchange-rate pass-through; New Keynesian model; DSGE; regime switching; Markov chain; central bank credibility (search for similar items in EconPapers)
JEL-codes: C3 E31 F31 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bkr:journl:v:78:y:2019:i:1:p:36-66

DOI: 10.31477/rjmf.201901.36

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