Revisiting the Exchange Rate Pass Through: A General Equilibrium Perspective

Mariana García-Schmidt () and Javier García-Cicco ()
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Mariana García-Schmidt: Central Bank of Chile
Javier García-Cicco: Central Bank of Argentina
Authors registered in the RePEc Author Service: Javier Garcia Cicco

No 201882, BCRA Working Paper Series from Central Bank of Argentina, Economic Research Department

Abstract: A large literature estimates the exchange rate pass-through to prices (ERPT) using reducedform approaches; whose results are an important input for analyses at Central Banks. We study the usefulness of these empirical measures for monetary policy analysis and decision making, emphasizing two main problems that arise naturally from a general equilibrium perspective. First, while the literature describes a single ERPT measure, in a general equilibrium model the evolution of the exchange rate and prices will differ depending on the shock hitting the economy. Accordingly, we distinguish between conditional and unconditional ERPT measures, showing that they can lead to very different interpretations. Second, in a general equilibrium model the ERPT crucially depends on the expected behavior of monetary policy, but the empirical approaches in the literature cannot account for this, providing a misleading guide for policy makers. We first use a simple model of a small and open economy to qualitatively show the intuition behind these two critiques. We then highlight the quantitative relevance of these distinctions by means of a DSGE model of a small and open economy with sectoral distinctions, real and nominal rigidities, and a variety of driving forces; estimated using Chilean data.

Keywords: inflation; exchange rate pass-through; monetary policy; general equilibrium models; DSGE model; Chile (search for similar items in EconPapers)
JEL-codes: E5 F3 F4 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2018-10
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Related works:
Journal Article: Revisiting the exchange rate pass through: A general equilibrium perspective (2020)
Working Paper: Revisiting the Exchange Rate Pass Through: A General Equilibrium Perspective (2018)
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