State space models for the exchange rate pass-through: determinants and null/full pass-through hypotheses

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Abstract:

In this article, we formulate linear Gaussian state space models for the estimation of the exchange rate pass-through of the Brazilian Real against the US Dollar, using monthly data from August 1999 to August 2008. The state space/Kalman filtering framework allows the investigation of some empirical aspects previously suggested in the literature, such as time-varying coefficients and null/full pass-through hypotheses. We also test whether some theoretical ‘determinants’ of the pass-through are statistically significant in the period considered. The principal findings are as follows: (1) the data offer strong support to a time-varying pass-through; and (2) the variance of the exchange rate pass-through, the monetary policy and the trade flow have shown to be relevant determinants of the exchange rate pass-through.

Keywords: C32; E31; E58; Kalman filter; exchange rate pass-through; inflation; linear restrictions; monetary policy; state space model

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2013.815397

Affiliations: 1: Diretoria de Analise de Politicas Publicas – Fundacao Getulio Vargas (FGV), Rio de Janeiro, Brazil 2: Brazilian Institute of Economics (IBRE-FGV), Rio de Janeiro, Brazil 3: Institute of Mathematics and Statistics – Fluminense Federal University (UFF), Niteroi, Brazil

Publication date: December 1, 2013

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