2014•RePEc: Research Papers in EconomicsRequires access

A Threshold Vector Autoregression Model of Exchange Rate Pass-Through in Mexico

Abdul Aleem, Amine Lahiani

Abstract

Considering nonlinearities in the exchange rate pass-through to domesticprices, this paper estimates exchange rate pass-through in Mexico. We examine responses of domestic prices to a positive one unit exchange rate shock by estimating a threshold vector autoregression (TVAR) model. A monthly rate of inflation of 0.79% acts as a threshold. The exchange rate pass-through to domestic prices is statistically significant above the threshold level of the inflation rate and statistically insignificant below it.

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Key concepts: Exchange rate, Vector autoregression, Exchange-rate pass-through, Shock (circulatory), Inflation (cosmology), Econometrics, Economics, Autoregressive model