Banco Central de Chile Documentos de Trabajo. Central Bank of Chile Working Papers EXCHANGE RATE PASS-THROUGH INTO IMPORT PRICES: THE CASE OF CHILE

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1 Banco Cenral de Chile Documenos de Trabajo Cenral Bank of Chile Working Papers N 465 Abril 2008 EXCHANGE RATE PASS-THROUGH INTO IMPORT PRICES: THE CASE OF CHILE Robero Álvarez Paricio Jaramillo Jorge Selaive La serie de Documenos de Trabajo en versión PDF puede obenerse grais en la dirección elecrónica: hp://www.bcenral.cl/esp/espub/esudios/dbc. Exise la posibilidad de soliciar una copia impresa con un coso de $500 si es denro de Chile y US$12 si es para fuera de Chile. Las soliciudes se pueden hacer por fax: (56-2) o a ravés de correo elecrónico: Working Papers in PDF forma can be downloaded free of charge from: hp://www.bcenral.cl/eng/sdpub/sudies/workingpaper. Prined versions can be ordered individually for US$12 per copy (for orders inside Chile he charge is Ch$500.) Orders can be placed by fax: (56-2) or

2 BANCO CENTRAL DE CHILE CENTRAL BANK OF CHILE La serie Documenos de Trabajo es una publicación del Banco Cenral de Chile que divulga los rabajos de invesigación económica realizados por profesionales de esa insiución o encargados por ella a erceros. El objeivo de la serie es aporar al debae emas relevanes y presenar nuevos enfoques en el análisis de los mismos. La difusión de los Documenos de Trabajo sólo inena faciliar el inercambio de ideas y dar a conocer invesigaciones, con carácer preliminar, para su discusión y comenarios. La publicación de los Documenos de Trabajo no esá sujea a la aprobación previa de los miembros del Consejo del Banco Cenral de Chile. Tano el conenido de los Documenos de Trabajo como ambién los análisis y conclusiones que de ellos se deriven, son de exclusiva responsabilidad de su o sus auores y no reflejan necesariamene la opinión del Banco Cenral de Chile o de sus Consejeros. The Working Papers series of he Cenral Bank of Chile disseminaes economic research conduced by Cenral Bank saff or hird paries under he sponsorship of he Bank. The purpose of he series is o conribue o he discussion of relevan issues and develop new analyical or empirical approaches in heir analyses. The only aim of he Working Papers is o disseminae preliminary research for is discussion and commens. Publicaion of Working Papers is no subjec o previous approval by he members of he Board of he Cenral Bank. The views and conclusions presened in he papers are exclusively hose of he auhor(s) and do no necessarily reflec he posiion of he Cenral Bank of Chile or of he Board members. Documenos de Trabajo del Banco Cenral de Chile Working Papers of he Cenral Bank of Chile Agusinas 1180 Teléfono: (56-2) ; Fax: (56-2)

3 Documeno de Trabajo Working Paper N 465 N 465 EXCHANGE RATE PASS-THROUGH INTO IMPORT PRICES: THE CASE OF CHILE Robero Álvarez Paricio Jaramillo Jorge Selaive Gerencia de Invesigación Económica Banco Cenral de Chile Gerencia de Invesigación Económica Banco Cenral de Chile Gerencia de Invesigación Económica Banco Cenral de Chile Resumen En ese rabajo esimamos el raspaso de ipo de cambio a precios de imporación a nivel desagregado y en frecuencia mensual. Trabajamos con precios de imporación a nivel de puero como al por mayor y nuesros resulados son coherenes con la idea de un raspaso alo compleo en el largo plazo que no ha declinado en ambos niveles de fijación de precios. Sin embargo, en el coro plazo, los precios al por mayor resulan menos sensibles a variaciones del ipo de cambio. Eso puede indicar la exisencia de un raspaso menos que perfeco en la cadena de disribución desde precios en puero a su conrapare al por mayor. Asimismo, enconramos una débil evidencia de asimería en el raspaso a nivel agregado de precios de imporación. Finalmene, exploramos si el alo y no declinane raspaso esá dado por la concenración de imporaciones chilenas en producos de alo raspaso, hipóesis que no es validada por nuesros resulados. Absrac In his paper we esimae he exchange rae pass-hrough (ERPT) ino disaggregaed impor price daa a monhly frequency. We work wih impor prices boh a he border and a he wholesale level, and our resuls are consisen wih he idea of a high ERPT complee in he long-run which has no declined for boh pricing levels. In he shorrun, however, wholesale prices seem o be less sensiive o exchange rae variaions. This may indicae he exisence of a pass-hrough less han perfec in he disribuion chain from prices a he border o is wholesale counerpar. In addiion, we find weak evidence of asymmeric pass-hrough from appreciaions versus depreciaions for he aggregae impor indexes. Finally, we also explore if he high and no declining ERPT is given by he fac ha Chilean impors are concenraed in producs wih such ERPT, and our resuls suppor he view ha his is no he case. We hank Igal Magendzo, Klaus Schmid-Hebbel, Claudio Soo and Rodrigo Valdés for commens and suggesions; he paricipans a he Annual Meeing of he Chilean Economic Sociey, and a he Cenral Bank of Chile s Inernal Seminar. We are also graeful o Jorge Sandoval, David Moreno, Francisco Ruiz and Teresa Cornejo for sharing he daa used in his work.

4 I. Inroducion Pass-hrough issues play a cenral role in he design of appropriae moneary policies and exchange rae regime opimaliy. Few years ago, he main discussion in his opic was abou he prevalence of producer currency- pricing (PCP) versus local currency pricing (LCP) of impors, and on wheher exchange rae pass-hrough raes are endogenous o a counry's inflaion performance. Now, here is consensus ha he pass-hrough is no complee. There is no one-o-one response of eiher consumer or impor prices o changes in exchange raes. This evidence is, in general, quie robus for developed and developing counries (Campa and Goldberg, 2005). Some recen research suggess ha impor prices in a number of indusrialized naions may have become progressively less responsive o changes in exchange raes over he pas decade or so. A decline in he exchange rae pass-hrough (ERPT) has obvious implicaions for sabiliy of domesic prices and for he curren accoun balance of he economy. In paricular, on he former issue, a low ERPT may conribue o low raes of inflaion since depreciaions of he domesic currency will no creae inflaionary pressures relaed o increases of impor prices. By conras, a low ERPT may creae difficulies in adjusing exernal balances when changes in impor (or expor prices) are needed o achieve corresponding changes in inernaional rade. The degree of exchange rae pass-hough, consequenly, has imporan implicaions for he design of moneary policy o counerac he inflaionary as well as rade implicaions of an exchange rae shock. We sudy he ERPT using Chilean daa of impor prices for he period The case of Chile is ineresing for several reasons. Firs, here is no much empirical evidence on 1

5 exchange rae pass-hrough in developing counries. Some recen excepions are Fuenes (2007) and Ca Zorzi e al. (2007), bu hey only esimae aggregae pass-hrough. As we show in he nex secions, we also esimae ERPT for differen ypes of goods. This is useful for he discussion on he causes of declining pass-hrough in some economies. Second, Chile has successfully implemened a floaing exchange rae regime since Sepember 1999 wihin a conex of lower inflaion raes under an inflaion argeing. As argued by Taylor (2000) he inflaionary environmen could be an imporan deerminan of he magniude of he ERPT coefficien. The analysis of aggregae pass-hrough raes can be divided ino wo pars. The firs par is a border phenomenon and addresses he exen o which here are changes in he passhrough rae a he level of impor prices. The second addresses he exen o which hese border price changes are ransmied o consumers or even offse by anicipaed curren or fuure moneary policy. By using informaion of boh a he border and wholesale impor prices, our analysis may conribue o deermine how prices reac o exchange rae movemens a differen sages of he markeing chain. Up o now he impac and dynamics of exchange rae changes on domesic prices in Chile has been exensively analyzed (García and Resrepo, 2003; Bravo, García, 2002; Noon, 2003; Morandé and Tapia, 2002; Edwards, 2007). 1 The pass-hrough from exchange rae changes o impor prices, however, has received less aenion, mainly due o lack of daa a a disaggregaed indusry level. We also esimae he pass-rough coefficien for differen ypes of goods. This is imporan considering he evidence by Campa and Goldberg (2005) and Marazzi and Shees 1 Appendix A presens a survey of previous conribuions for Chile. 2

6 (2007) ha reducions in he aggregae coefficien may reflec changes in he composiion of impors or higher compeiion in some secors. 2 The impor price indexes of he Cenral Bank of Chile allow us o esimae pass-rough for hree ypes of goods classified by end use: (i) consumer goods, (ii) inermediae goods, and (iii) capial goods. In addiion, we esimae ERPT for he subcomponens of hese aggregae indexes using a unique daabase of uni values of impors for 40 producs. In he case of impored goods a he wholesale level, we esimae ERPT for hree secors: (i) mining, (ii) agriculure, and (ii) indusry. The sandard specificaions, on which his paper is based, are ypically derived from a parial equilibrium seup. They miss some of he srucural elemens of a more general equilibrium framework. For insance, he specificaions lack explici reamen of expecaions as well as he conduc of moneary policy. However, exchange rae passhrough hus calculaed can provide some insigh ino he likely underlying srucural facors. Our resuls indicae a high and no declining pass-rough from exchange rae changes o impor prices. The las resul is in conras wih previous evidence for some oher counries where ERPT has declined over ime and opens ineresing quesions regarding why his no happening in Chile. In addiion, our evidence shows imporan differences in pass-hrough along he markeing chain. In fac, shor-run ERPT ends o be larger for goods a he border han for impored wholesale goods. In addiion, we find weak evidence of asymmeric pass-hrough for he aggregae impor indexes. There is some evidence of asymmeries for capial goods and agriculure, bu hey are specific o hese producs and 2 In fac, Marazzi and Shees (2007) find ha par of he declining ERPT o impor prices in he U.S. is due o higher compeiion from China. 3

7 hey have no been refleced in he aggregae indexes. Finally, we do no find evidence ha he large and no declining pass-hrough is given by he fac ha Chilean impors are concenraed in producs wih high ERPT. The remainder of his paper is divided ino four secions. The second secion presens a review of he relaed lieraure. The hird secion presens he empirical approach. The fourh secion describes he daa. In he fourh secion we show and discuss he resuls. We conclude in he las secion. II. Brief Lieraure Review Goldberg and Kneer (1997) summarize he exensive lieraure on pass-hrough and he law of one price and show why incomplee pass-hrough persiss even as rade and economic inegraion increase. More recen developmens which include macroeconomic explanaions are summarized by Frankel, e al. (2005). They noe ha smaller counries, counries wih a higher presence of foreign firms, and less developed counries generally end o have higher pass-hrough of exchange raes ino prices. During he 1990s, many researchers observed ha ERPT ino prices were relaively mue in some counries. 3 The lieraure has urned o he issue of he relaively widespread and ongoing decline in exchange-rae pass-hrough. These observaions led o raise he hypohesis of a link beween macroeconomic variables such as moneary policy and ERPT. Taylor (2000) aribues he decline in pass-hrough o he shif by hose counries owards a low-inflaion environmen, mainly o he adopion of inflaion argeing. Taylor argues ha he exchange rae pass-hrough ino impor prices maers only when here are persisen 4

8 exchange rae changes. These end o be mued in an environmen where inflaion is low and moneary policy is credible, because he pricing power of firms is diminished in a low inflaion regime. His model inroduces nominal rigidiies and marke imperfecions ino a dynamic general equilibrium o formalize he previous argumen. Taylor s hypohesis has srong implicaions for moneary policy. In he case ha he decline in pass-hrough is an oucome of he low inflaion environmen of recen years, he gains in price sabiliy can be fragile and poenially eliminaed by adverse price shocks. Alernaively, if srucural reasons are behind he decline in ERPT such as diminishing pricing power of firms, he regime of price sabiliy may be more robus. Campa and Goldberg (2005) conclude ha he Taylor argumen has some saisical meri, bu i is no of firs order imporance for OECD counries. Far more imporan for overall pass-hrough raes are changes in he composiion of indusries in a counry's impor baske. In paricular, he auhors claim ha he composiion of impors wih a larger concenraion in manufacured producs has been he primary driver behind he decline in pass-hrough changes ino impor prices. In fac, hey conclude ha i comes mainly from he decline in he impor share of primary commodiies such as raw maerials and fuels. Oani e al. (2003, 2005) make he case for Japanese impor prices, ha he decline in ERPT is mosly aribuable o he decrease in he exchange rae pass-hrough in each produc caegory. For he Euro Area, Campa, Goldberg and Mínguez (2005) analyze he ransmission raes from exchange raes o impor prices, across counries and produc caegories. They repor significan heerogeneiy across indusries wih a large pass-hrough in he shor run. 3 Appendix A has a summary revision of previous conribuions. 5

9 Moreover, hey observe a lower ERPT ino impor prices in indusries producing differeniaed goods. More recenly, Ihrig e al. (2006) for impor-price pass-hrough find ha all G-7 counries experienced a decline in he responsiveness of impor prices o exchange-rae movemens; for nearly half of hese counries he decline beween and is saisically significan. They esimae ha while a 10 percen depreciaion in he local currency would have increased impor prices by nearly 7 percen on average across hese counries in he lae 1970s and 1980s, i would have only increased impor prices by 4 percen in he pas 15 years. Frankel e al. (2005) perform esimaions for 76 counries and find empirical suppor for some of he facors ha have been hypohesized in he lieraure. Significan deerminans of he pass-hrough coefficien include per capia incomes, bilaeral disance, ariffs, counry size, wages, long-erm inflaion, and long-erm exchange rae variabiliy. Some of hese facors changed during he 1990s. According o hese auhors, par of he downward rend in pass-hrough o impored goods prices can be explained by changes in he moneary environmen. For Chile, here some recen conribuions exploring he ERPT ino impor prices. Ca Zorzi, e al. (2007) perform esimaions for 12 emerging markes, among hem Chile, using quarerly daa from he IMF s Inernaional Financial Saisics and he Cenral Bank of Chile, for he period They repor a high degree of pass-hrough ino impor prices. On he oher hand, Edwards (2007) uses quarerly wholesale prices ha include domesic and impored goods for he period , finding a long-run pass-hrough of 6

10 0.056 for he period wih inflaion argeing (and for he pre-inflaion-argeing period). Finally, Fuenes (2007), using informaion from he IFS-IMF for Argenina, Chile, Colombia and Brazil, repors a high bu decreasing ERPT ino impor prices for Chile. 4 There are some mehodological differences beween his work and hese earlier sudies. Firs, we use monhly insead of quarerly daa. Second, we use impor prices a wo differen sages of he markeing chain. Third, we sudy goods-specific differences in ERPT using classificaions of goods by end use and indusry. II.1 Measuring ERPT: Firs and Second Sage Exchange rae pass-hrough is usually defined as he responsiveness of prices including consumer prices, producer prices, impor prices, and someimes he prices se by domesic exporers o exchange rae movemens. One sandard way o esimae exchange rae pass-hrough is hrough he coefficien obained from regressing changes in price indexes on movemens in nominal effecive exchange raes. There are several reasons why prices could no be fully ransmied o consumers. For insance, Bursein e al. (2003) claim ha, given ha impored goods have o go hrough a disribuion secor o reach consumers, incorporaing local value added makes consumer prices less sensiive o exchange rae changes. 5 Oher auhors have emphasized he idea ha impors are inermediae goods. Bacchea and Wincoop (2002) develop a model where hese inermediae goods compee wih domesic non-rade goods, and hey show ha if his secor is large enough, here could be a full pass-hrough o impors prices and no pass- 4 Noe, however, ha Fuenes (2007) characerizes he evidence of declining pass-horough as weak for Chile. 7

11 hrough o consumer prices. The disincion beween firs- and second-sage pass-hrough reflecs differen concerns for branches of he lieraure. In he academic lieraure of inernaional economics or indusrial organizaion, pass-hrough has ofen been calculaed based on impor prices or he prices se by domesic exporers, while pass-hrough o consumer prices has more recenly come o he aenion of researchers, especially wihin cenral banks. The disincion allows for differen pricing behavior along a disribuion chain. The pricing behavior of foreign exporers or domesic imporers is hough o affec firs-sage pass-hrough, and ha of domesic disribuors is hough o be relevan for second-sage pass-hrough. The difference in hese pricing behaviors may lead o differen developmen in each sage of pass-hrough. Firs-sage pass-hrough can, in general, be derived from a firs-order condiion of a foreign monopolisic exporer's profi maximizaion in a saic parial equilibrium model. The reduced expression relaes impor prices in domesic currency as he dependen variable o a se of independen variables ha includes effecive exchange rae expressed in erms of unis of domesic currency per uni of foreign currency and oher conrol variables such as commodiy prices, oupu gap, and foreign coss, among ohers. In he nex secion we derive an explici reduced form for he ERPT of he firs sage. The second-sage pass-hrough which measures he effecs of exchange rae flucuaions on consumer prices is usually compued by esimaing a backward-looking Phillips curve which relaes domesic consumer prices o impor prices and oher conrol variables (Sekine, 2006). 5 They show ha disribuion coss accoun for more han 40% of reail prices in he U.S. 8

12 III. Empirical Approach Since we are ineresed in he firs-sage pass-hrough, le us consider impor prices for j any ype of goods j, P, as a ransformaion of expor prices of a counry's rading parners, j XP : P = E XP, (1) where we obain: E is he bilaeral exchange rae (we omi subscrip j ). Using logs in definiion (1), p = e + xp (2) Here, he expor price consiss of he exporers marginal cos and a markup, which in logs gives he following expression: xp = mc + mkup (3) Replacing for xp ino equaion (2): p = e + mc + mkup (4) Using he previous expression, we may raionalize a leas hree effecs on impor prices which are associaed o changes in he exchange rae: (1) he uniy ranslaion effecs of he exchange rae movemen; (2) he response of he markup in order o offse his ranslaion effec; (3) he effec on he marginal cos ha is aribuable o exchange rae movemens, such as he sensiiviy of inpu prices o exchange raes. In his conex, here is abundan lieraure explaining and formalizing why he pass-hrough from he exchange rae ino impor prices may be differen from 1. 9

13 Markup responsiveness depends on he marke share of domesic producers relaive o foreign producers, he form of compeiion ha akes place in he marke for he indusry, and he exen of price discriminaion. Generally, a larger share of impors in oal indusry supply, higher degree of price discriminaion or a larger share of impored inpus in he producion process in he desinaion counry leads o a higher prediced pass-hrough. ERPT may be higher if he raio of exporers relaive o local compeiors is high (e.g. for commodiies or oil), and lower if exporers compee for marke shares (e.g. for manufacured goods), even if nominal exchange rae variabiliy is high. Oher facors affecing pass-hrough are he currency denominaion of expors and he srucure and imporance of inermediae goods markes. Exporers of a given produc can choose o absorb some of he exchange rae variaions insead of passing hem hrough o he price in he imporing counry currency. If he passhrough is complee (producer-currency pricing), heir markups will no respond o exchange rae flucuaions, hus leading o a pure currency ranslaion. A he oher exreme, hey can decide no o vary he prices in he desinaion counry s currency (localcurrency pricing or pricing o marke) and absorb he flucuaions wihin he markup. Thus, markups in an indusry are assumed o consis of a componen specific o he ype of good, independen of he exchange rae and a reacion o exchange rae movemens: mkup = α + Ω (5) e Moreover, marginal coss are ypically modeled as a funcion of demand condiions in he imporing counry ( y ), marginal coss of producion (labor wages, fw ) in he exporing counry, and he commodiy prices denominaed in foreign currency ( fcp ): 10

14 mc ρ 0 y + ρ1 fw + ρ2e + ρ3 = fcp (6) Subsiuing (6) and (5) ino (4), we obain: ip = α + (1 + Ω + ρ 2 ) e + ρ0 y + ρ1 fw + ρ3 β fcp + ε, (7) where he coefficien β on he exchange rae e is he pass-hrough elasiciy. In his approach we canno idenify Ω from ρ 2. Thus, following Campa and Goldberg (2005) we assume ha he erm ρ + + fcp, which is independen of he exchange rae, is 0 y ρ1 fw ρ3 refleced in he world price of he produc, U.S. dollar). Thus, he final equaion can be re-wrien as follows: fp, in he world currency (here aken o be he p = α + βe + γfp + ε (8) Equaion (8) gives us he long-run relaionship beween he impor price, he exchange rae and a measure of foreign price. This equaion expressed in firs differences, including lagged exchange rae and foreign producion coss o allow for a gradual adjusmen of impor prices, becomes: Δ log P = α + δ Δ log E + γ ΔX + λδz + ε, (9) i i i where P is an impors price index (measured in local currency), E is he nominal exchange rae, X is a vecor of conrol variables for exporer coss, Z is a vecor of oher conrols for he imporer marke characerisics, especially, economic aciviy, and is an error erm wih sandard characerisics. 6 The shor- and long-run coefficiens will be given 6 I should be noed ha if he coinegraed equilibrium relaionship were o exis, he equaion o be esimaed should conain an error correcion erm (ECT) as in Engle and Granger (1987). We esimae he equaion wih and wihou he ECT and he resuls are he same. In some cases, however, he ECT is no significan. Then, we only show resuls of equaion (9). 11

15 by δ 0 and δ i, respecively. Following previous work, we use lags up o one year (12 monhs in our case) and we only sum up he significan coefficiens o calculae he longrun exchange rae pass-hrough. IV. Daa We use a unique monhly daase assembled by he Naional Accouns Deparmen of he Cenral Bank of Chile which conains impor uni value indexes (IUVI) disinguishing 40 caegories according o he Cenral Produc Classificaion (CPC), for he period January May These caegories accoun for around 80% of oal Chilean impors. These producs have been aggregaed ino hree main subcomponens by end use: (i) consumer goods, (ii) inermediae goods, and (iii) capial goods. 7 Table 1 shows he 40 caegories organized according o he ype of produc. The number 1, 2 or 3 idenifies goods ha are in each caegory. For insance, for mea producs (CPC code 14) we have informaion of impor prices for consumer and inermediae goods. The second source of informaion is he monhly survey of wholesale impor prices carried ou by he Naional Insiue of Saisics (INE), which disinguishes impored goods from hree secors: (i) mining, (ii) agriculure, and (iii) indusry. This daa covers he period from January 1996 o May Deails regarding mehodological aspecs of he CPC are discussed in appendix A. 12

16 Table 1. Impor prices: Cenral Produc Classificaion CPC Code Producs CPC Code Producs 1 Agriculure and horiculure (3) 30 Leaher Producs (3) 2 Frus, nus, spices and plans (1) and (3) 31 Foowear (1) and (3) 3 Live animals (2) and (3) 32 Wooding producs, cork and sraw (1) and (3) 4 Foresry (3) 33 Pulp, paper and cardboard (1) and (3) 5 Fish and oher fishing producs (3) 34 Prining and Recording (1) and (3) 6 Hulla and lignio; urba (3) 35 Refined oil producs, nuclear fuels (3) 9 Copper producs (3) 36 Basic Chemical producs (3) 14 Mea and mea producs (1) and (3) 37 Oher chemical producs; exile manufacuring (3) 15 Prepared and canned fish (1) and (3) 38 Plasic producs (1) and (3) 16 Prepared and canned frus and vegeables (1) and (3) 39 Oher plasic producs (1) and (3) 17 Vegeable and animal oil (3) 40 Glass and oher non mealic producs (1) and (3) 19 Grinding and sifing producs of whea (1) 41 Manufacuring of oher mineral non mealic producs (1) and (3) 21 Sugar and sarch (3) 42 Iron and seel producs (3) 22 Oher nuriional food (1) and (3) 43 Meallurgic producs (3) 23 Spiris (1) and (3) 44 Elaboraed mealic produco ex machinery and equipmen (1) and (3) 24 Wine 45 Machinery and equipmen (1), (2) and (3) 25 Mal beverages (1) 46 Machinery, elecric and elecronic producs (1), (2) and (3) 27 Tobacco producs (1) 47 Transporaion producs (1) and (3) 28 Texiles (1) and (3) 48 Furniure (1) and (3) 29 Clohing (1) and (3) 49 Oher non specific indusry (1) and (3) Source: Cenral Bank of Chile Noe: (1) Consumpion goods; (2) capial goods and (3) Inermediae goods. In our esimaions we use wo alernaive definiions for he nominal exchange rae: U.S. dollar pariy (Chilean peso/u.s. dollar) and mulilaeral nominal exchange rae from he IMF. 8 The vecor of conrol variables for exporer coss are hose ypically used in oher sudies (see Edwards, 2007, Campa and Goldberg, 2005). As a proxy for foreign prices, we use he exernal price index (EPI) calculaed by he Cenral Bank. This index is a raded weighed average of producer price indexes of he main Chilean rading parners, which uses oal rade (expors plus impors) as he weigh of each counry s price index. 9 We recalculae he EPI using he weighs of impors from each counry insead of oal rade. We also conrol for changes in impor prices associaed o exernal shocks by including a commodiies price index minus fuel obained from he Inernaional Moneary Fund s Inernaional Financial Saisics. Changes in domesic economic aciviy are capured by he 8 As boh variables generae similar resuls, we presen he esimaions only using he nominal effecive exchange rae. 9 In some cases, when producer price indexes are no available, consumer prices indexes are used. Available a hp://si2.bcenral.cl/basededaoseconomicos/951_713.asp?cap=

17 monhly index of economic aciviy (IMACEC). All series are seasonally adjused before performing he esimaions. Figure 1 presens he annual growh raes of impor prices and exchange raes. I can be appreciaed ha, in general, changes in impor prices are closely correlaed wih changes in he nominal exchange rae. The simple correlaion coefficien beween exchange rae and impor prices is 0.69 for impor uni values and 0.82 for wholesale impor prices. This suggess an expeced high ERPT ino impor prices. There are, however, some excepions. Specifically, mining secor (hird figure in panel b) shows several periods where movemens in exchange raes were no accompanied by changes in impor prices in he same direcion. The simple correlaion wih exchange rae movemens in his case is Figure 1. Impor Prices and he Exchange Rae (Annual growh raes as log differences) Panel A. Impor Uni Value Index and Sub Componens Impor Uni Value Toal Index Nominal Effecive Exchange Rae Impor Uni Value Index (Consumpion) Nominal Effecive Exchange Rae Impor Uni Value Index (Inermediae) Nominal Effecive Exchange Rae Impor Uni Value (Capial) Nominal Effecive Exchange Rae Panel B. W holesale Impor Price Index and Sub Componens Wholesale Impor Price Toal Index Nominal Effecive Exchange Rae Wholesale Impor Prices (Agriculure) Nominal Effecive Exchange Rae Wholesale Impor Prices (Indusrial) (righ) Nominal Effecive Exchange Rae (lef) Wholesale Impor Prices (Mining) Nominal Effecive Exchange Rae Source: Auhors elaboraion. 10 For consumer, inermediae and capial goods i is 0.82, 0.52, and 0.80, respecively. For indusry and agriculures is 0.92, and 0.66, respecively. 14

18 V. Esimaions In his secion we presen he resuls of our esimaions. Firs, we summarize he resuls for he aggregae indexes, disinguishing a he border and wholesale impor prices. Second, we analyze he exisence of asymmeries in ERPT. Third, we show he resuls for individual ime series esimaions for he 40 caegories deailed in Table 1. V.1 Aggregae Resuls The firs esimaion was done using aggregae impor uni value indexes and he corresponding hree subcomponens: (i) consumer goods, (ii) inermediae goods, and (iii) capial goods. Panel A of Table 2 depics he resuls for he shor- and long-run ERPT 11. We consider lag srucures of one year (12 lags) of changes of he nominal exchange rae o calculae he long-run pass-hrough. Only significan coefficiens are added o obain he long-run ERPT. We es he hypohesis ha he long-run pass-hrough is equal o 1. The resuls show ha he shor-run coefficien is 0.83 for he aggregae index, greaer for inermediae goods (0.89), and lower for consumer and capial goods (0.74 and 0.72, respecively). The only shor-run coefficien for which he hypohesis ha is equal o 1 canno be rejeced is ha for inermediae goods. In he case of he long-run ERPT, he evidence is consisen wih he idea of full adjusmen of impor prices o exchange rae movemens for he aggregae price index and for each ype of good. This is in line wih mos of he inernaional evidence presened by Campa and Goldberg (2005) and for four Lain American counries in Fuenes (2007). 15

19 As has been discussed in previous secions, here is some inernaional evidence suggesing ha ERPT has been declining in he las decades. Alhough our informaion is for a shor period of ime, we look a poenial changes in his parameer. Figure 2 shows he resuls for he shor-run ERPT from recursive regressions. The evidence seems o sugges some decline in ERPT around , bu an increase laer on. In general, our resuls do no show a clear paern of reducion in pass-hrough ino impor prices. If anyhing, here has been an increase over he pas few years. Table 2. ERPT o Impor Prices Impor Uni Values Aggregae Consumpion Inermediae Capial Shor-run ERPT * [0.09] [0.09] [0.11] [0.09] Long-run ERPT * * * * [0.12] [0.14] [0.22] [0.12] Wholesale Prices Aggregae Agriculure Mining Indusrial Shor-run ERPT [0.07] [0.13] [0.37] [0.07] Long-run ERPT * * * [0.12] [0.16] [0.43] [0.05] Noes: - Newey-Wes HAC Sandard Errors & Covariance under Andrews (1991) s mehod auomaic lag runcaion. Mulilaeral nominal exchange rae index considering weighs by he main rading parners in oal impors. Models esimaed wih 12 lags of he change in he exchange rae. * The hypohesis ha he long-run ERPT is equal o 1 is rejeced a 5% significance level. Source: Auhors calculaions. 11 The uni roos and coinegraion analysis shows ha he relevan series are I(1) wih exisence of a mos one long run relaionship. The economerics approach inernalizes hese resuls and is concordan wih he characerisics of previous inernaional lieraure. 16

20 Figure 2. Sabiliy of he Shor-Run ERPT Coefficiens Impor Uni Value Indexes Recursiv e Coef f icien: Aggregae Index ± 2 S.E Recursiv e Coef f icien: Consumpion Sub Componen ± 2 S.E Recursiv e Coef f icien: Inermediae Sub Componen ± 2 S.E Recursiv e Coef f icien: Capial Sub Componen ± 2 S.E Source: Auhors calculaions. In he second panel of Table 2 we show he esimaes using he wholesale impor prices. Our resuls generally show a lower degree of ERPT in he shor run compared o impor uni values. Compare he ERPT for he aggregae index of 0.52 wih he ERPT of 0.83 for goods a he border. For he aggregae index and for each of he secors, we can rejec he hypohesis ha he pass-hrough is complee in he shor run. Moreover, he coefficien is no differen from zero for mining producs. The long-run ERPT is, in general, complee for he wholesale impored goods. The only excepion is he agriculural secor. The coefficien is 0.58, and i is saisically differen from zero, bu differen from 1. In Figure 3, analogous o impor uni values, we presen he resuls of recursive regressions for he shor-run pass-hrough coefficien. For he aggregae index and for he hree secors considered, he evidence suggess a no declining ERPT: 17

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