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Conditional exchange rate pass-through and monetary policy credibility: Insights from Uruguay and Chile

María Fernanda Cuitiño, Juan Medina and Laura Zacheo

Economic Modelling, 2022, vol. 114, issue C

Abstract: The exchange rate pass-through (ERPT) to local prices is critical for determining inflation dynamics and monetary policy. Different factors have been considered to explain the variation of the ERPT across time and countries. This paper aims to disentangle the role of shocks and monetary policy credibility on the ERPT, estimating medium-scale New Keynesian models for Uruguay and Chile that explicitly incorporate the possibility of imperfect credibility. The estimations show a significant degree of imperfect credibility in Uruguay and an important role for exchange rate stabilization in the monetary policy rule. Both aspects are interlinked and should be tackled together by the monetary authority in Uruguay. The estimated ERPT tends to be lower when the shock has an offsetting effect in aggregate demand and when monetary policy is more credible. Estimations for Chile stress that this country has well anchored inflation expectations and a very small degree of exchange rate stabilization.

Keywords: Exchange rate pass-through; Emerging economy; Imperfect credibility; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E12 E58 F31 F41 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:114:y:2022:i:c:s0264999322001729

DOI: 10.1016/j.econmod.2022.105926

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