Nonlinear mechanisms of the exchange rate pass-through: a Phillips curve model with threshold for Brazil

Abstract

ContentsThis paper investigates the presence of nonlinear mechanisms of pass-through from the exchange rate to inflation in Brazil. In particular, it estimates a Phillips curve with a threshold for the pass-through. The paper examines whether the short-run magnitude of the pass-through is affected by the business cycle, direction and magnitude of exchange rate changes, and exchange rate volatility. The results indicate that the short-run pass-through is higher when the economy is growing faster, when the exchange rate depreciates above some threshold and when exchange rate volatility is lower. Este trabalho investiga a presença de mecanismos não-lineares de

Nonlinear Mechanism of the Exchange Rate Pass-Through: Does Business Cycle Matter?

“…This is true for 3 out of their 6 Inflation Target countries. Similarly, in a Phillips curve threshold framework, Correa & Minella (2006) suggest that when the output gap is above a certain threshold, ERPT becomes higher in Brazil. Moreover, Goldfajn & Werlang (2000) provide an evidence of asymmetric behavior of ERPT over the business cycle in a panel of 71 countries.…”

“…In addition to the estimated threshold level and the speed of transition, we report ERPT coefficients for the two extremes regimes, i.e. low and high activity regimes (G(s t ; γ, c) = 0 and G(s t ; γ, c) = 1, respectively) as defined in equation (9) 17 . 14 In their studies, Goldfajn & Werlang (2000) and Correa & Minella (2006) used the output gap as proxy for the economic activity. However, as explained by Nogueira Jr. & Leon-Ledesma (2008), the use of an ad hoc detrending processes like the output gap might eliminate valuable information from the data.…”

“…The authors found that depreciations have a higher pass-through to prices in periods of expansion. Using Phillips curve threshold model, Correa & Minella (2006) gave a support of a nonlinear dynamic behavior of ERPT with respect to business cycle in Brazil. Similarly, in a nonlinear smooth transition framework, Nogueira Jr. & Leon-Ledesma (2008) find that pass-through responds nonlinearly to the output growth in 3 out of 6 Inflation Target countries.…”

An estimation of the hybrid Phillips curve for Brazil in the inflation targeting regime

“…A outra vertente da literatura mais recente tem estudado a Curva de Phillips por meio de modelos não lineares com Fasolo & Portugal (2004), Muinhos (2004), Arruda et al (2008), Correa & Minella (2010), Areosa et al (2011), Arruda et al (2011), entre outros. Os resultados mostraram que, em geral, essa categoria de modelos apresenta maior aderência à teoria e tendem a serem mais adequados para explicar dinâmica da inflação brasileira.…”

“…Nesse sentido, Correa & Minella (2010) encontraram evidência de que repasse cambial o repasse de curto prazo é maior quando a economia está em expansão, quando a taxa de câmbio se deprecia acima de determinado limiar e quando a volatilidade da taxa de câmbio é menor. Além disso, a apreciação cambial tem contribuído na redução da inflação, mas possivelmente com uma defasagem superior a um trimestre.…”