Exchange rate pass-through in the Colombian car market
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The series Borradores de Economía (Working Papers on Economics) contributes to the dissemination and promotion of the work by researchers from the institution. On multiple occasions, these works have been the result of collaborative work with individuals from other national or international institutions. This series is indexed at Research Papers in Economics (RePEc). The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.
Abstract
The incomplete pass-through of exchange rates to prices is a well-documented phenomenon. Firms respond optimally to exchange rate shocks by adjusting margins and buying inputs from regions with more advantageous terms of trade. Consumers, in turn, substitute goods that become more expensive for relatively cheaper goods after an exchange rate shock. We use data from the market for new cars in Colombia to empirically analyze the determinants of incomplete passthrough after a large depreciation of the local currency. We estimate a structural oligopoly model that nests the optimal reactions of firms and consumers to assess their relative importance in explaining the lack of response of retail prices to the exchange rate shock. We find that, in relative terms, the most important factor explaining incomplete pass-through is consumer substitution, followed by strategic interaction between sellers.
26TH OF MARCH, 2024 - 
