State space models for the exchange rate pass-through: determinants and null/full pass-through hypotheses

Rafael Martins de Souza, Luiz Felipe Pires Maciel and Adrian Pizzinga

Applied Economics, 2013, vol. 45, issue 36, 5062-5075

Abstract: In this article, we formulate linear Gaussian state space models for the estimation of the exchange rate pass-through of the Brazilian Real against the US Dollar, using monthly data from August 1999 to August 2008. The state space/Kalman filtering framework allows the investigation of some empirical aspects previously suggested in the literature, such as time-varying coefficients and null/full pass-through hypotheses. We also test whether some theoretical 'determinants' of the pass-through are statistically significant in the period considered. The principal findings are as follows: (1) the data offer strong support to a time-varying pass-through; and (2) the variance of the exchange rate pass-through, the monetary policy and the trade flow have shown to be relevant determinants of the exchange rate pass-through.

Date: 2013
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DOI: 10.1080/00036846.2013.815397

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