WP 2011-12: Exchange rate pass-through and inflation targeting in Peru
WP 2011-12: Exchange rate pass-through and inflation targeting in Peru
WP 2011-12: Exchange rate pass-through and inflation targeting in Peru
N°
WP 2011-12
Title
Exchange rate pass-through and inflation targeting in Peru
Author(s)
Diego Winkelried
Language
English
Date
2011/07/31
Abstract
It has been widely documented that the exchange rate pass-through to domestic inflation has decreased significantly in most of the industralised world. As microeconomic factors cannot completely explain such a widespread phenomenon, a macroeconomic explanation linked to the inflationary environment - that a low and more stable inflation rate leads to a decrease in the pass-through - have gained popularity. Using a structural VAR framework, this paper presents evidence of a similar decline in the pass-through in Peru, a small open economy that gradually reduced inflation to international levels in order to adopt a fully-fledged inflation targeting scheme in 2002. It is argued that the establishment of a credible regime of low inflation has been instrumental in driving the exchange rate pass-through down.