Asymmetries of the Exchange Rate Pass Through to Domestic Prices: The Case of Costa Rica

Esquivel Monge, Manfred and Gomez Rodriguez, Jose Fabio (2010): Asymmetries of the Exchange Rate Pass Through to Domestic Prices: The Case of Costa Rica. Published in: CEMLA (June 2010)

Abstract

By using a logistic smooth transition vector autoregressive model this paper examines whether the exchange rate had asymmetric effects on inflation in Costa Rica during the period 1991-2009. Three basic questions are tried to be answered: Is there any variable that significantly induces asymmetries on the exchange rate pass through? Do positive and negative shocks on exchange rate have symmetric effects on the price level? Is there any evidence that the size of the shocks determines the relative size of the impact on inflation of a given shock on the exchange rate? Among many variables, it is found that lagged change in oil prices is the most appropriate transition variable, which means that it induces the greatest asymmetric effects on the pass-through. On average, when this transition variable is above certain threshold level, the pass-through is two times higher. There is no strong evidence of sign or magnitude asymmetries, which means that the pass-through is expected to be essentially the same when there is a positive or a negative shock on the exchange rate and when such shocks are big or small.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate pass through, inflation, depreciation, asymmetries, smooth transition models
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

References

Carpio, Eddy and Omar Mendoza (2007). El pass through en Guatemala: Evidencias a través de un modelo regresivo con transición suave. Colección Economía y Finanzas, Serie Documentos de Trabajo, n° 82. Banco Central de Venezuela.

Castrillo, Grettel and Bernal Laverde (2008). Validación y actualización del modelo de pass through del tipo de cambio en Costa Rica: 1991-2007. Informe Técnico DIE-16-2008-IT. Banco Central de Costa Rica.

Castrillo, Grettel and Adolfo Rodríguez (2009). Procedimiento para la aplicación de pruebas de raíz unitaria. Nota técnica DEC-DIE-018-NT. Banco Central de Costa Rica.

Choudhri, Ehsan and Dalia Hakamura (2001). Exchange Rate Pass Through to Domestic Prices: Does the Inflationary Environment Matter? IMF Working Paper 01/194. Washington DC.

Esquivel, Manfred and Mario Rojas (2007). Identificación del parámetro de suavizamiento del filtro de Hodrick y Prescott adecuado para el comportamiento cíclico de la actividad económica en Costa Rica. Nota técnica DIE-02-2007-NT. Banco Central de Costa Rica.

Goldfang, Ilan and Sergio Werland (2000). The Pass-Through from Depreciation to Inflation: A Panel Study . Working Paper 5. Banco Central do Brasil.

Granger, Clive and TimoTeräsvirta (1993). Modelling Nonlinear Economic Relationships. Oxford University Press. New York.

Hamilton, James D. (1994). Time Series Analysis. Princeton University Press p.318 - 323

Koop, Gary, M. Hashem Pesaran and Simon M. Potter (1996). Impulse response analysis in nonlinear multivariate models. Journal of Econometrics 74, p. 119 – 147

Khundrakpam, Kumar Jeevan (2004). Economic reforms and exchange rate pass-through to domestic prices in India. BIS Working Paper No 225. Bank for International Settlements.

León, Jorge, Ana P. Morera and Welmer Ramos (2001). El pass through del tipo de cambio: Un análisis para la economía costarricense de 1991 al 2001. Documento de investigación DIE-DM-11-2001-DI. Banco Central de Costa Rica.

León, Jorge, Bernal Laverde and Rodolfo Durán (2002). El pass through del tipo de cambio en los precios de bienes transables y no transables en Costa Rica. Documento de investigación DIE-05-2002-DI. Banco Central de Costa Rica.

Luukkonen, Ritva, Pentti Saikkonen and Timo Teräsvirta (1988). Testing Linearity against Smooth Transition Autoregressive Models. Biometrika 75(3), p 491-99.

Mendoza, Omar and Luis E. Pedagua (2006). El pass through del tipo de cambio en los precios de bienes y servicios en Venezuela. Serie de documentos de trabajo N°70. Banco Central de Venezuela. 21

Mendoza, Omar. (2004). Las asumetrías del Pass-Through en Venezuela. Colección de Economía y Finanzas. Serie de documentos de trabajo N°62. Banco Central de Venezuela.

Mendoza, Omar. (2006). Introducción a la estimación de modelos regresivos con transición suave. Mimeo. Pollard, Patricia and Cletus Coughlin (2004). Size Matters: Asymmetric Exchange Rate Pass-Through at the Industry Level. University of Nottingham Research Paper No. 2004/13 Przystupa,

Jan and Ewa Wróbel. (2009). Asymmetry of the exchange rate pass-through: An exercise on the Polish data. National Bank of Poland. http://www.ub.edu/jei/papers/PRZYSTUPA-WROBEL.pdf

Correa, Arnildo da Silva and André Minella (2006). Nonlinear mechanisms of the exchange rate pass-through: A Phillips curve model with threshold for Brazil. Working Paper Series No 122. Research Department, Central Bank of Brazil.

Taylor, J (2000). Low Inflation, Pass Through, and the Pricing Power of Firms. European Economic Review 44, 1389-408 Teräsvirta, Timo. (1994). Specification, Estimation and Evaluation of Smooth Transition Autoregressive Models. Journal of the American Statistical Association 89(425), p 208-18.

Tong, Howel and K.S. Lim (1980). Threshold autoregressions, limit cycles, and data. Journal of the Royal Statistical Society. Series B 42,

Weise, Charles. (1999). The Asummetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach. Journal of Money, Credit and Banking. Vol 31, No 1. Winkelried, Diego (2003). ¿Es asimétrico el pass-through en el Perú? Un análisis agregado. VIII Reunión de Red de Investigadores de Banco Central del Continente Americano. CEMLA.