Exchange Rate Pass-Through Effects: A Disaggregate Analysis of Colombian Imports of Manufactured Goods*

 

Hernán Rincón
Edgar Caicedo
Norberto Rodríguez**
March 2005

Abstract

Colombian monthly data covering the period from 1995:01 to 2002:11 and ECM, fixed and time-varying parameters and Kalman filter techniques are used in this paper to quantify the exchange rate pass-through effects on import prices within a sample of manufactured imports. Also, whether the foreign exchange and inflation regimes affect the degree of pass-through is evaluated. The analytical framework used was a mark-up model. The main finding is that the long-run pass-through elasticities for the industries in the sample are stable and go from 0.1 to 0.8 and the short-run ones are unstable and go from 0.1 to 0.7, supporting mark-up hypotheses, in contrast to the hypotheses of perfect market competition and complete pass-through. The findings also show evidence of the variability and different degrees of pass-trough among manufacturing sectors, which confirm the importance of using dynamic models and disaggregate data for an analysis of the pass-through. Both, the hypothesis that under a floating regime there is a low degree of pass-through and the hypothesis that a low inflation environment has the same result are not supported.

Clasificación JEL:
F31; F41; E31; E52; C32; C51; C52
Palabras Clave:

Pass-through effects; PPP; Imperfect competition; Floating regime; Low inflation environment; Fixed parameter model; Time-varying parameter model; Kalman filtering
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* We are grateful to Hernando Vargas, Leonardo Villar, and Munir Jalil for their comments. Aaron Garavito, Carlos Patiño, and Camilo Rodriguez provided research assistance. The views expressed in this paper are those of the authors and do not represent those of the Banco de la República or the Board of Directors. We are solely responsible for any errors of omission or commission. Corresponding author’s e-mail address: hrincoca@banrep.gov.co
** In the order in which they are listed, the first author belongs to the Research Unit, the second one to the Inflation Office, and the last one to the Econometric Unit, of the Economic Studies Department of the central bank of Colombia (Banco de la República).