ISSN 58-3548 Working Paper Series Nonlinear Mechanisms of he Exchange Rae Pass-Through: A Phillips curve model wih hreshold for Brazil Arnildo da Silva Correa and André Minella November, 006
ISSN 58-3548 CGC 00.038.66/000-05 Working Paper Series Brasília N. Nov 006 P. -30
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Nonlinear Mechanisms of he Exchange Rae Pass-Through: A Phillips curve model wih hreshold for Brazil * Arnildo da Silva Correa ** André Minella ** The Working Papers should no be repored as represening he views of he Banco Cenral do Brasil. The views expressed in he papers are hose of he auhor(s) and do no necessarily reflec hose of he Banco Cenral do Brasil. Absrac This paper invesigaes he presence of nonlinear mechanisms of pass-hrough from he exchange rae o inflaion in Brazil. In paricular, i esimaes a Phillips curve wih a hreshold for he pass-hrough. The paper examines wheher he shor-run magniude of he pass-hrough is affeced by he business cycle, direcion and magniude of exchange rae changes, and exchange rae volailiy. The resuls indicae ha he shor-run pass-hrough is higher when he economy is growing faser, when he exchange rae depreciaes above some hreshold and when exchange rae volailiy is lower. These resuls have imporan implicaions for moneary policy and are possibly relaed o pricing-o-marke behavior, menu coss of price adjusmen and uncerainy abou he degree of persisence in exchange rae movemens. Keywords: Exchange Rae Pass-Through, Threshold, Inflaion, Nonlineariy, Brazil JE Classificaion: E3, E50, E58 * We are hankful o Fabio Araújo and Tomiê Sugahara for heir paricipaion in iniial esimaions, Carlos Hamilon Araújo, Ana Beariz Galvão and Marcelo Kfoury Muinhos for suggesions, Érica Oliveira and Ibiisan Sanos for assisance wih daa, and ohers colleagues a he Research Deparmen of he Cenral Bank of Brazil for heir conribuions and commens. The views herein are hose of he auhors and do no necessarily reflec hose of he Cenral Bank of Brazil. ** Research Deparmen, Cenral Bank of Brazil. E-mails: arnildo.correa@bcb.gov.br and andre.minella@bcb.gov.br 3
. Inroducion The presence of nonlineariies in he Phillips curve has relevan implicaions for moneary policy. The slope of he Phillips curve measuring he response of inflaion o oupu gap affecs direcly he cos of disinflaion. Schaling (004) shows ha, when he Phillips curve is convex, ha is, he sensiiviy of inflaion o economic aciviy increases wih he level of oupu, he opimal moneary policy reacion funcion is asymmeric. Nonlineariy may also be presen in he pass-hrough from exchange rae changes o prices. If he pass-hrough, for insance, is greaer when he economy is booming, we may consider ha he cenral banks reacion o a depreciaion of he domesic currency will be sronger in his conex. In fac, he invesigaion of he presence of nonlinear mechanisms in he Phillips curve has been an imporan opic in he recen lieraure. Mos sudies on nonlinear Phillips curves for developed economies have focused on he slope of he Phillips curve and he exchange rae pass-hrough. In he firs case, axon, Rose and Tambakis (999) and Bean (000) find evidence ha he Phillips curve is convex, while Sigliz (997) and Eisner (997) claim ha he Phillips curve is concave. The lieraure on exchange rae pass-hrough, in urn, repors several sources of nonlineariy, indicaing ha he degree of pass-hrough can be relaed o some macroeconomic variable, including he exchange rae. Mann (986), Goldberg (995), Gil-Pareja (000), Mahdavi (00) and Olivei (00) have found asymmeric pass-hrough relaed o he direcion of exchange rae changes, while Ohno (989) and Pollard and Coughlin (004) have indicaed he presence of asymmery associaed wih he magniude of exchange rae changes. The business cycle is also poined ou as an imporan source of nonlineariy for he pass-hrough. The ransmission of exchange rae depreciaions o domesic prices would be lower during an economic slowdown. Goldfajn and Werlang (000), esimaing a panel daa model for 7 counries, have found ha depreciaions have a higher pass-hrough o prices when he economy is booming. In he case of Brazil, Carneiro, Moneiro and Wu See, for insance, Chadha, Masson and Meredih (99), axon, Meredih and Rose (995), Dupasquier and Rickes (998), Nobay and Pell (000), Aguiar and Marins (00), Tambakis (999), and Clemens and Sensier (003). 4
(00) have found similar resuls esimaing a backward-looking Phillips curve wih he pass-hrough coefficien as a funcion of unemploymen rae and real exchange rae level. 3 In hese papers, he magniude of he pass-hrough coefficien is a funcion of some variables. This paper invesigaes he possibiliy of a nonlinear pass-hrough in Brazil using hreshold models. These models are par of a class of models ha consider differen saes of naure or regimes and allow differen dynamic behavior for he variables, condiional on he regime prevailing in each momen (Franses and van Dijk, 000). In he case of hreshold models, he sample is divided ino classes based on wheher he value of an observed variable surpasses or no some hreshold. This kind of model Threshold Auoregressive (TAR) Model was iniially proposed by Tong (978) and Tong and im (980) and has spread in he recen applied economic lieraure. We focus on he pass-hrough because exchange rae movemens have played a key role in he inflaion dynamics in Brazil, especially in he early years of he inflaion argeing regime wih recurren bous of exchange rae depreciaion in response o shocks, in he conex of balance of paymens vulnerabiliies. We esimae hree specificaions for he Phillips curve, which differ basically by he variable used as he hreshold for he passhrough: i) oupu gap; ii) nominal exchange rae change; and iii) exchange rae volailiy. Thus, we can deal wih differen possible sources of nonlineariy. The firs quesion is wheher economic aciviy affecs he magniude of he pass-hrough. The second one is wheher he pass-hrough is symmeric wih respec o he direcion of he exchange rae change wheher appreciaions or depreciaions have symmeric effecs on prices and o he magniude of he exchange rae change. The esimaions indicae ha he shor-run pass-hrough is higher when he economy is growing faser, when he exchange rae depreciaes above a hreshold value and when exchange rae volailiy is lower. These resuls have implicaions for moneary policy and are possibly relaed o pricing-o-marke behavior, coss of changing prices, and uncerainy regarding he degree of persisence of exchange rae changes. Filardo (998), in urn, considers ha he Phillips curve is neiher enirely convex nor concave, bu a combinaion of boh (a concave-convex curve). 3 Muinhos (00) has found mixed resuls, and Bogdansky, Tombini and Werlang (000) work wih a model for Brazil wih a nonlinear pass-hrough as well. 5
The aricle is organized as follows. Secion ses forh he mehodology of hreshold models wih he presence of endogenous variables. Secion 3 presens he specificaions of he Phillips curve wih hreshold and he esimaion resuls. The las secion concludes he ex.. Threshold models wih endogenous variables In hreshold models, he sample is divided ino classes based on he value of an observed variable wheher i surpasses or no some hreshold. As usual in pracice, he hreshold is no known and needs o be esimaed. The simples model is he SETAR (Self- Exciing Threshold Auoregressive Model), where he hreshold is given by a lagged erm of he dependen variable y -d, where d>0. An AR() model of wo regimes and d= can be wrien as: φ0 + φ y + ε if y τ y =, () φ 0 + φ y + ε if y τ where is he hreshold value, j φ i are he parameers i of he regime j, and ε is an i.i.d. whie noise sequence condiional on he hisory of he series, denoed by Ω y,..., y, y }, wih zero mean and variance σ. Alernaively, his model can = { p p be expressed as: y = ( φ 0 + φ y )[ I ( y τ )] + ( φ0 + φ y ) I( y τ ) + ε, () where I(.) is an indicaor funcion ha akes a value equal o eiher one or zero, depending on he regime a ime. For hese models wih exogenous regressors, here is a well-developed heory of inference and esimaion 4. In he case of models wih endogenous variables, in urn, he heory is sill working in progress. Caner and Hansen (004) develop an esimaor and an 4 See, for example, Chan (993), Hansen (996, 999, 000) and Caner (00). 6
inference heory for his kind of model, wih he resricion ha he hreshold variable mus be exogenous. A model wih endogenous regressors can be described as follows. e n { y, z, x} = be he informaion se, where y is unidimensional, z is an m-dimension vecor (regressors), and x is a k-dimension vecor (insrumens), wih k 6DA JDHAID @ variable q = q x ) can be an elemen or a funcion of he vecor x. In a general way, he ( srucural equaion can be wrien as: y = θz + ζ y = θ z + ζ q τ, (3) q τ or in a more compac way, y = θ ) + z[ I( q τ )] + θzi( q τ ζ, (4) where θ j are parameer vecors, τ Τ, and T is he se of he possible hreshold values. Since he error erm ζ is correlaed wih z a leas one variable in vecor z is endogenous equaion (4) canno be esimaed by ordinary leas squares (OS) because parameers would be biased and inconsisen. The mehod proposed by Caner and Hansen (004) is based on he esimaion of a reduced form equaion for he endogenous variables as a funcion of insrumenal variables, ha is, a model wih he condiional mean of he endogenous variables as a funcion of exogenous variables. The esimaed values are plugged ino srucural equaion (4) and he hreshold value is esimaed by minimizing he sum of he squared residuals. The parameers of he srucural equaion are esimaed in a hird sep, when he sample is divided according o he esimaed hreshold. The esimaion is conduced using he wosage leas square mehod (SS) or he generalized mehod of momens (GMM). Therefore, he firs sage (condiional expecaions model of z ) is given by: 7
z = f ( x, β ) + u, (5) E ( u x ) = 0, (6) where β is a vecor wih parameers, u is he error erm, and f (.,.) is a funcion. In paricular, his funcion can also be condiioned on he hreshold value (which can be equal or differen from ha in he srucural equaion): 5 f ( x, β) ( β x )[ I( q τ )] + ( β x )[ I( q )]. (7) = τ as: The parameer vecor β in equaion (5) can be obained by OS, for each T, n n β ( τ ) = [ ( τ )] x x I q x z[ I( q τ )], (8) = = n n β( τ ) = [ ( τ )] x x I q x z[ I( q τ )]. (9) = = Using parameers β, we can obain he values ẑ ha will replace z in he srucural equaion. Doing i recursively for every T, he hreshold value in he srucural equaion can be chosen by he minimizaion of he sum of he squared residuals, using a grid search. For every, le Y, Z and Z G denoe he vecor y and he marices z [ I( τ )] e z [ I( τ )], respecively. Thus, he hreshold esimaor is obained from: q q τ = arg min S ( τ ), (0) τ T n where S n (τ ) is he sum of he squared residuals in he regression of Y on Ẑ and Ẑ G. The se of hreshold values in (0) should be such ha each regime has sufficien observaions 5 In his paper, we do no condiion on he hreshold value in his firs sage. 8
9 o generae reliable parameer esimaion. According o Franses and van Dijk (999), a safe choice is a leas 5% of he sample. Given he esimaed hreshold value τ, he sample is divided ino subsamples, and parameers of equaion (0) can be esimaed by SS as: ( ) ( ) = Y Z Z Z θ, () ( ) ( ) = Y Z Z Z G G G G G G G G G G G θ, () where Ẑ, G Ẑ, e G sand for he marices wih observaions )] ( [ τ q I z, )] ( [ τ q I z, )] ( [ τ q I x and )] ( [ τ q I x, respecively. Caner and Hansen (004) show ha hose esimaors are consisen, alhough no necessarily efficien. Their applicabiliy is condiioned on he exogeneiy of he hreshold variable. 3. Phillips curve model for Brazil Aiming o es he possibiliy of he presence of a nonlinear pass-hrough from he exchange rae o inflaion, we esimae some Phillips curve models for Brazil combined wih he mehodology of regime swiching described in he previous secion. The esimaed Phillips curve relaes inflaion o a measure of real disequilibrium (oupu gap), inflaion expecaions, pas inflaion, exchange rae changes and exernal inflaion, wih a hreshold variable: + + + Δ + + = + + + Δ + + = + + τ ε α π α π α α π α π τ ε α π α π α α π α π q if y e E q if y e E 4 * 4 * ) ( ) ( ) ( ) (, (3) where j i α is he parameer of a specific regressor i when he economy is in regime j, π is free IPCA inflaion (headline inflaion measured by he Broad Naional Consumer Price
Index, bu excluding adminisered prices), π is headline IPCA inflaion, * π is a measure of exernal inflaion (PPI in he U.S.), y is oupu gap (acual minus poenial oupu) 6, e is he naural logarihm of he average nominal exchange rae (domesic currency unis per dollar), E (.) is he expecaions operaor condiional on he informaion available a, Δ is he difference operaor ( Δe = e e andτ T, where T is he se of possible values for q. ), ε is a residual, q is he hreshold variable, The dependen variable is he free prices componen of headline inflaion because adminisered prices have a differen price dynamics, parially obeying conrac rules. Noe ha he esimaed pass-hrough refers o he ransmission from exchange rae change in he previous quarer o he curren inflaion, ha is, i capures only he shor-run effec of exchange rae movemens. To enable he join esimaion, he previous equaions become: π * ( αeπ + + ( α α) π + α( Δe + π ) + α4 y )( I[ q τ ) * ( α Eπ + + ( α α ) π + α ( Δe + π ) + α4 y )( I[ q τ ) + ε = +. (4) Based on heoreical indicaions for a nonlinear exchange rae pass-hrough, we evaluae hree hreshold variables: i) business cycle, measured by he oupu gap; ii) magniude of nominal exchange rae changes; and iii) a measure of exchange rae volailiy. We use quarerly daa from 995: hrough 005:4 and esimae using SS, wih insrumenal variables for he inflaion expecaions erm. The firs esimaed specificaion has he oupu gap as he hreshold variable. In his model, all parameers, excep for ha of he oupu gap, are subjec o regime swiching. 7 The esimaion resuls are he following (p-values in parenheses): 6 The oupu gap used in he esimaion was generaed using a producion funcion model. See, for example, he box "Mehodologies for esimaing he poenial oupu" in Banco Cenral do Brasil (003) and Muinhos and Alves (003) for a descripion of he mehodology. 7 We do no allow he coefficien on oupu gap o change because we wan o capure nonlineariies in he pass-hrough. 0
π π * = 0.75E π + + 0.5π + 0.00( Δe + π ) + 0.4y if y.89% (0.00) (0.3) (0.78) (0.00) * = 0.58Eπ + + 0.33π + 0.09( Δe + π ) + 0.4y if y.89% (0.0) (0.) (0.03) (0.00) Sample period: 995: 005:4 Sandard errors esimaed using Newey-Wes consisen esimaors P-values in parenheses Impulse dummy variable for 999:: 0.0, p-value: 0.00 Insrumenal variables: cons., dummy variable, π, π, Δ * * e, Δe, π, π, y R-squared: 0.50 Adjused R-squared: 0.43 Breusch-Godfrey Serial Correlaion M es, p-values: lag: 0.54, 4 lags: 0.33 Whie Heeroskedasiciy Tes, p-value: 0.7 Jarque-Bera Normaliy Tes, p-value: 0.57 Wald es α =, p-value: 0.04 α According o he esimaion resuls, here is a nonlineariy in he pass-hrough erm relaed o he business cycle: he exchange rae pass-hrough is no saisically differen from zero in he regime when he economy is below he hreshold, whereas i is around 9% when economic aciviy is higher. According o he Wald es, we rejec he null ha he wo pass-hrough coefficiens are equal. The exchange rae pass-hrough is significanly greaer when oupu is above some hreshold 8, esimaed a.89% below he poenial oupu. This means ha, during an economic slowdown, an exchange rae variaion will have a smaller impac on domesic prices. This is usually poined as one of he facors ha limied he pass-hrough in Brazil during he 999 exchange rae crisis. One limiaion of his resul is is implicaion ha exchange rae appreciaions have a higher pass-hrough when he economy is booming han when he oupu gap is below he hreshold. The oher parameer esimaes are in line wih hose found in he lieraure using models wihou a hreshold variable. Excep for he backward-looking erm, all coefficiens are saisically significan a 5%. In addiion, he esimaed value for he hreshold splis he sample ino wo approximaely equal pars (9 observaions when y <. 89 %, and 5 when y. 89 %). This means ha, alhough he sample size is no large, none of he 8 This resul is in line wih hose in Goldfajn and Werlang (000), and Carneiro, Moneiro and Wu (00).
regimes was esimaed wih an exremely low number of observaions. 9 Acually, we have ried several specificaions, using differen insrumens for he expecaions erm, and he resuls were robus. The second esimaed model considers nominal exchange rae changes as he hreshold variable. Similarly o he previous model, all parameers are allowed o vary wih he regime change, excep for he oupu gap parameer, kep consan in boh regimes. The esimaion resuls are he following 0 : π * = 0.58E π + + 0.40π + 0.0( Δe + π ) + 0.7y if Δe (0.00) (0.00) (0.3) (0.0).0% π * = 0.44E π + + 0.45π + 0.( Δe + π ) + 0.7y if Δe.0%. (0.0) (0.07) (0.03) (0.0) Sample period: 995: 005:4 Sandard errors esimaed using Newey-Wes consisen esimaors P-values in parenheses Impulse dummy variable for 999:: 0.03, p-value: 0.08 Insrumen variables: cons., dummy var., π, π, π 3, Δ e, Δe, π, π, y R-squared: 0.50 Adjused R-squared: 0.43 Breusch-Godfrey Serial Correlaion M es, p-values: lag:.00, 4 lags: 0.38 Whie Heeroskedasiciy Tes, p-value: 0.69 Jarque-Bera Normaliy Tes, p-value: 0.3 Wald es α =, p-value: 0.06 α * * Those resuls indicae ha he shor-run effec of exchange rae changes on inflaion is asymmeric. In he case of large exchange rae depreciaions, he esimaed pass-hrough for he following quarer is around %, whereas appreciaions or small depreciaions do no have a saisically significan effec. The Wald es rejecs he null hypohesis ha boh coefficiens are equal. Therefore, he pass-hrough is greaer when quarer-on-quarer depreciaions are equal o or larger han.%. Alhough he resuls on he effec of an 9 Including he period previous o he launch of he Real Plan is no recommendable because he inflaion dynamics in a high inflaion regime is subsanially differen, disoring he esimaion. 0 In ha specificaion, we have used for he backward-looking inflaion and oupu gap erms he average of A A superscrip A means acual values. Tha specificaion generaes beer fiing. A A heir values a - and -, ha is, π = ( π + π )/ and y = ( y + y )/, where he
appreciaion in he previous quarer on curren inflaion were no saisically significan, we should no infer ha appreciaions are no ransmied o prices. This ransmission can ake place wih more lags han in he case of depreciaion. As before, he esimaed parameers are robus wih respec o he insrumens used and are saisically significan a 5% (excep he coefficien on lagged inflaion when Δ e.0% ). Moreover, he number of observaions in each regime was reasonably balanced (5 observaions in he large depreciaion regime, and 9 in he oher) and he esimaed values for he coefficiens are close o hose repored in he lieraure. Noe ha in boh esimaions he forward-looking inflaion coefficien is greaer han he backwardlooking componen. Since he esimaed hreshold is no zero, is slighly posiive value (close o %) suggess he presence of menu coss or some adjusmen coss of prices, where small exchange rae changes are no promply ransmied o prices. If price changes are cosly, a small change in he currency value can be accommodaed wihin he markup margin. In his case, firms end o pospone heir decisions, adjusing heir markup in he shor-run. However, if exchange rae changes surpass some limi, even if he change is emporary, he coss of no adjusing prices are higher, leading firms o change prices more rapidly. Consequenly, he presence of menu coss increases he possibiliy ha firms will adjus price mainly if exchange rae changes surpass some hreshold, resuling in an asymmeric pass-hrough relaed o small and large exchange rae changes. Furhermore, pricing-o-marke heory delivers an explanaion for a parial passhrough and for an asymmery relaed o appreciaions and depreciaions in he exchange rae. Consider he domesic secor formed by subsidiaries of foreign firms ha produce abroad and sell heir producs inernally. In he case of an exchange rae depreciaion, hose firms have hree opions: i) o reduce heir markup o keep sable he price in local currency (absence of pass-hrough); ii) o keep heir markup, increasing he price charged in local currency o reflec compleely he exchange rae change (complee pass-hrough), which may imply a marke share reducion; or iii) a combinaion of he previous wo possibiliies (parial pass-hrough). When subsidiary firms are rying o build up or keep heir marke shares, a local currency depreciaion resuls in a lower pass-hrough han ha when here is an 3
appreciaion. Neverheless, if he depreciaion of he domesic currency is high, here is less room for markup adjusmens, and a leas parially he depreciaion is ransmied o domesic prices o avoid losses. In he case of appreciaion, firms profis increase if hey keep consan domesic prices, which could resul in a longer period o adjus prices downwards. The exension of hese effecs on he price level in he economy depends on he price-elasiciy of demand for hese firms goods and on he degree of openness of he economy. In addiion, if he firms ha produce abroad face a resricion on heir producion capaciy, an exchange rae appreciaion can resul in a lower pass-hrough han in he case of a depreciaion. The resricion capaciy limis he fall in domesic price ha he appreciaion could generae. The previous esimaed models do no make any disincion beween he pre-999 period, when he exchange rae was managed following in pracice a crawling peg sysem and he following period of a floaing rae. In fac, when we include a sep dummy ino he exchange rae erm, he resuls deeriorae subsanially in erms of signs and saisical significance of he parameers. This resul may be relaed o he increase in he number of parameers o be esimaed when we include a dummy variable, reducing he degree of freedom of he esimaion. Because of hose limiaions, we have esimaed a hird model, using exchange rae volailiy as he hreshold variable. This esimaion would end o resolve, a leas parially, he problem of he separaion of he exchange rae regimes (before and afer January 999) because he hreshold esimaion ends o classify he observaions of he managed sysem period ino he low volailiy regime. In principle, he low volailiy esimaed regime could also conain observaions from when he exchange rae was relaively sable during he floa period. In addiion, ha esimaion aims o capure he inflaionary effecs in wo differen siuaions: i) when agens perceive exchange rae changes as ransiory; and ii) when hey perceive hem as permanen. When agens consider exchange rae variaions as more permanen, more promply hey will be ransmied o prices. Our assumpion is ha he probabiliy ha agens consider changes as permanen is higher in periods of low exchange 4
rae volailiy and smaller in periods of greaer volailiy. Thus, we would expec a lower pass-hrough in periods of higher exchange rae insabiliy. We have used he sandard deviaion of daily changes in he exchange rae wihin each quarer as he measure of volailiy. The esimaion resuls were he following : π * 0.5Eπ + + 0.05π + 0.80( Δe + π ) + 0.3y if σ e, = (0.74) (0.83) (0.) (0.00) 0.07% π * 0.30Eπ + + 0.63π + 0.07( Δe + π ) + 0.3y if σ e, = (0.07) (0.00) (0.05) (0.00) 0.07%. Sample period: 995: 005:4 Sandard errors esimaed using Newey-Wes consisen esimaors P-values in parenheses Impulse dummy variable for 999:: 0.03, p-value: 0.00 Insrumenal variables: cons., dummy variable, π, π, Δ * * e, Δe, π, π, y R-squared: 0.5 Adjused R-squared: 0.45 Breusch-Godfrey Serial Correlaion M es, p-values: lag: 0.69, 4 lags: 0. Whie Heeroskedasiciy Tes, p-value: 0.3 Jarque-Bera Normaliy Tes, p-value: 0. Wald es α =, p-value: 0.5 α In erms of magniude, he poin esimaes indicae a greaer pass-hrough in low volailiy periods han in high volailiy momens (80% and 7%, respecively). However, he esimaed pass-hrough is no saisically significan in he low volailiy regime, alhough i is significan in he oher regime and he parameer values are close o hose repored in he lieraure for he periods of managed and floaing exchange raes. 3 The resuling sample division assigned mos of he observaions of he managed sysem o he Albuquerque and Porugal (006), for example, explore he relaionship beween exchange rae volailiy and inflaion in Brazil, using a bivariae GARCH model. In ha specificaion, we have used for he backward-looking inflaion erm he average of heir values a - π A A A, and for he oupu gap erm, he average a - and - 3, - and -3, ha is, = ( π + π + π )/ 3 A generaed beer fiing. A, ha is, y = ( y + y )/, where he superscrip A means acual values. Tha specificaion has 5
low volailiy regime. The observaions corresponding o values below he hreshold comprise he 995:4 998: period. Neverheless, according o he Wald es, we canno rejec he null ha boh coefficiens are equal, and he resuls of his Phillips curve specificaion are less robus han hose of he wo previous models. Therefore, hese resuls should be considered wih more cauion. Figure illusraes he resuls concerning he firs model esimaed. I presens he quarerly free price inflaion, he exchange rae change (lagged one period), and a line ha indicaes he hreshold value (-.89%) of oupu gap. This line separaes he periods when oupu gap is above and below he hreshold. We poin ou some periods, described in Table, in which he esimaed model can explain, a leas parially, he relaion beween exchange rae changes and free price inflaion. The able records he corresponding values, besides including headline inflaion (measured by IPCA). Figure Free price inflaion, exchange rae changes and he oupu gap Free price inflaion (%) 7 6 5 4 3 0 - - -3 d + d d + d + a + I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III 998 999 000 00 00 003 004 005 Free price inflaion Period ou pu gap above he hr eshol d Period ou pu gap bel ow he hreshold Exchange rae change (-) 40 5 0-5 -0-35 Exchange rae change (%) 3 Muinhos and Alves (003), por insance, have found a coefficien reducion from 5% o 6% afer he change in he exchange rae regime, and Albuquerque and Porugal (005), using a Kalman filer model, have esimaed parameers values around 4% and 4%, respecively. 6
Period Table Inflaion and exchange rae changes in seleced periods Characerisic Headline inflaion Headline inflaion Free price inflaion in - in in - in in - 999: II d.88.05.59 0.49 39.33 000:III d + 0.66 3.8 0.7.93.64 00:II d +.4.5.4.40 4.39 00:III d +.5.33.40.4.69 00:III d +.44.58 0.6.56 4.87 00:IV d +.58 6.56.56 6.34.30 004:IV a +.94.00.35.3 -.30 005:I a +.00.79.3.7-6.80 005:II a +.79.34.7.40-4.4 Noe: d + means depreciaion wih booming d means depreciaion wih recession a + means appreciaion wih booming a means appreciaion wih recession The exchange rae change is calculaed based on he quarerly exchange rae average Free price inflaion Exchange rae change In he second quarer of 999 (immediaely afer he floa), for insance, in spie of he 39% exchange rae depreciaion in he previous quarer, free price inflaion was only 0.49% and he headline inflaion sood a.05%, boh below he previous quarer values. In ha period, he oupu gap was below he esimaed hreshold (economic slowdown), which implies, according o he model, a low pass-hrough o inflaion. The depreciaions in he hird quarer of 000 and during 00, in urn, were followed by higher increases in he inflaion rae. In ha period, he oupu gap was higher han he esimaed hreshold. In mid-00, when he economy was growing faser, a srong depreciaion was accompanied by a grea inflaion rise. In he las quarer, for insance, when he depreciaion in he previous quarer reached %, free price inflaion wen from.56% o 6.34%, and headline inflaion rose from.58% o 6.56%. On he oher hand, alhough inflaion fell along 005, i did no follow so promply he exchange rae appreciaion sared in he las quarer of 004. One possible explanaion lies on he asymmery of he shor-run pass-hrough wih respec o appreciaion and depreciaion, pu in evidence by he model wih he hreshold given by exchange rae changes. Furhermore, iniial movemens of appreciaion were possibly no perceived immediaely as having longer duraion, posponing he effec on prices. In fac, he model esimaes he shor-run pass-hrough, ha is, he effec on curren inflaion of he change in 7
he exchange rae in he previous quarer. The appreciaion conribued for he reducion in inflaion, bu probably wih lags greaer han one quarer. 4. Conclusions This paper explores he possibiliy of he presence of a nonlinear pass-hrough from he exchange rae o inflaion in Brazil. We have esimaed models for he Phillips curve combined wih he mehodology of hreshold models. In hese models, he parameer values depend on which regime he economy is, which are deermined endogenously by means of an observed variable. The choice of variables used was based on he possible sources of nonlineariy of he pass-hrough repored in he lieraure. In paricular, we have examined hree sources: i) business cycle; ii) exchange rae changes; and iii) exchange rae volailiy. The esimaions indicae he presence of nonlinear mechanisms in he shor-run pass-hrough in Brazil. The shor-run pass-hrough is higher when he economy is booming, when he exchange rae depreciaes above some hreshold, and when exchange rae volailiy is lower. These resuls have imporan implicaions for moneary policy and are possibly relaed o a pricing-o-marke behavior, menu coss o change prices, and uncerainy abou he degree of persisence of exchange rae changes. 8
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Banco Cenral do Brasil Trabalhos para Discussão Os Trabalhos para Discussão podem ser acessados na inerne, no formao PDF, no endereço: hp://www.bc.gov.br Working Paper Series Working Papers in PDF forma can be downloaded from: hp://www.bc.gov.br Implemening Inflaion Targeing in Brazil Joel Bogdanski, Alexandre Anonio Tombini and Sérgio Ribeiro da Cosa Werlang Políica Moneária e Supervisão do Sisema Financeiro Nacional no Banco Cenral do Brasil Eduardo undberg Moneary Policy and Banking Supervision Funcions on he Cenral Bank Eduardo undberg 3 Privae Secor Paricipaion: a Theoreical Jusificaion of he Brazilian Posiion Sérgio Ribeiro da Cosa Werlang 4 An Informaion Theory Approach o he Aggregaion of og-inear Models Pedro H. Albuquerque 5 The Pass-Through from Depreciaion o Inflaion: a Panel Sudy Ilan Goldfajn and Sérgio Ribeiro da Cosa Werlang 6 Opimal Ineres Rae Rules in Inflaion Targeing Frameworks José Alvaro Rodrigues Neo, Fabio Araújo and Mara Balar J. Moreira 7 eading Indicaors of Inflaion for Brazil Marcelle Chauve 8 The Correlaion Marix of he Brazilian Cenral Bank s Sandard Model for Ineres Rae Marke Risk José Alvaro Rodrigues Neo 9 Esimaing Exchange Marke Pressure and Inervenion Aciviy Emanuel-Werner Kohlscheen 0 Análise do Financiameno Exerno a uma Pequena Economia Aplicação da Teoria do Prêmio Moneário ao Caso Brasileiro: 99 998 Carlos Hamilon Vasconcelos Araújo e Renao Galvão Flôres Júnior A Noe on he Efficien Esimaion of Inflaion in Brazil Michael F. Bryan and Sephen G. Cecchei A Tes of Compeiion in Brazilian Banking Márcio I. Nakane Jul/000 Jul/000 Jul/000 Jul/000 Jul/000 Jul/000 Jul/000 Sep/000 Sep/000 Nov/000 Mar/00 Mar/00 Mar/00
3 Modelos de Previsão de Insolvência Bancária no Brasil Marcio Magalhães Jano 4 Evaluaing Core Inflaion Measures for Brazil Francisco Marcos Rodrigues Figueiredo 5 Is I Worh Tracking Dollar/Real Implied Volailiy? Sandro Canesso de Andrade and Benjamin Miranda Tabak 6 Avaliação das Projeções do Modelo Esruural do Banco Cenral do Brasil para a Taxa de Variação do IPCA Sergio Afonso ago Alves Evaluaion of he Cenral Bank of Brazil Srucural Model s Inflaion Forecass in an Inflaion Targeing Framework Sergio Afonso ago Alves 7 Esimando o Produo Poencial Brasileiro: uma Abordagem de Função de Produção Tio Nícias Teixeira da Silva Filho Esimaing Brazilian Poenial Oupu: a Producion Funcion Approach Tio Nícias Teixeira da Silva Filho 8 A Simple Model for Inflaion Targeing in Brazil Paulo Springer de Freias and Marcelo Kfoury Muinhos 9 Uncovered Ineres Pariy wih Fundamenals: a Brazilian Exchange Rae Forecas Model Marcelo Kfoury Muinhos, Paulo Springer de Freias and Fabio Araújo 0 Credi Channel wihou he M Curve Vicorio Y. T. Chu and Márcio I. Nakane Os Impacos Econômicos da CPMF: Teoria e Evidência Pedro H. Albuquerque Decenralized Porfolio Managemen Paulo Couinho and Benjamin Miranda Tabak 3 Os Efeios da CPMF sobre a Inermediação Financeira Sérgio Mikio Koyama e Márcio I. Nakane 4 Inflaion Targeing in Brazil: Shocks, Backward-ooking Prices, and IMF Condiionaliy Joel Bogdanski, Paulo Springer de Freias, Ilan Goldfajn and Alexandre Anonio Tombini 5 Inflaion Targeing in Brazil: Reviewing Two Years of Moneary Policy 999/00 Pedro Fachada 6 Inflaion Targeing in an Open Financially Inegraed Emerging Economy: he Case of Brazil Marcelo Kfoury Muinhos 7 Complemenaridade e Fungibilidade dos Fluxos de Capiais Inernacionais Carlos Hamilon Vasconcelos Araújo e Renao Galvão Flôres Júnior Mar/00 Mar/00 Mar/00 Mar/00 Jul/00 Abr/00 Aug/00 Apr/00 May/00 May/00 Jun/00 Jun/00 Jul/00 Aug/00 Aug/00 Aug/00 Se/00 3
8 Regras Moneárias e Dinâmica Macroeconômica no Brasil: uma Abordagem de Expecaivas Racionais Marco Anonio Bonomo e Ricardo D. Brio 9 Using a Money Demand Model o Evaluae Moneary Policies in Brazil Pedro H. Albuquerque and Solange Gouvêa 30 Tesing he Expecaions Hypohesis in he Brazilian Term Srucure of Ineres Raes Benjamin Miranda Tabak and Sandro Canesso de Andrade 3 Algumas Considerações sobre a Sazonalidade no IPCA Francisco Marcos R. Figueiredo e Robera Blass Saub 3 Crises Cambiais e Aaques Especulaivos no Brasil Mauro Cosa Miranda 33 Moneary Policy and Inflaion in Brazil (975-000): a VAR Esimaion André Minella 34 Consrained Discreion and Collecive Acion Problems: Reflecions on he Resoluion of Inernaional Financial Crises Arminio Fraga and Daniel uiz Gleizer 35 Uma Definição Operacional de Esabilidade de Preços Tio Nícias Teixeira da Silva Filho 36 Can Emerging Markes Floa? Should They Inflaion Targe? Barry Eichengreen 37 Moneary Policy in Brazil: Remarks on he Inflaion Targeing Regime, Public Deb Managemen and Open Marke Operaions uiz Fernando Figueiredo, Pedro Fachada and Sérgio Goldensein 38 Volailidade Implícia e Anecipação de Evenos de Sress: um Tese para o Mercado Brasileiro Frederico Pechir Gomes 39 Opções sobre Dólar Comercial e Expecaivas a Respeio do Comporameno da Taxa de Câmbio Paulo Casor de Casro 40 Speculaive Aacks on Debs, Dollarizaion and Opimum Currency Areas Aloisio Araujo and Márcia eon 4 Mudanças de Regime no Câmbio Brasileiro Carlos Hamilon V. Araújo e Geúlio B. da Silveira Filho 4 Modelo Esruural com Seor Exerno: Endogenização do Prêmio de Risco e do Câmbio Marcelo Kfoury Muinhos, Sérgio Afonso ago Alves e Gil Riella 43 The Effecs of he Brazilian ADRs Program on Domesic Marke Efficiency Benjamin Miranda Tabak and Eduardo José Araújo ima Nov/00 Nov/00 Nov/00 Nov/00 Nov/00 Nov/00 Nov/00 Dez/00 Feb/00 Mar/00 Mar/00 Mar/00 Apr/00 Jun/00 Jun/00 Jun/00 4
44 Esruura Compeiiva, Produividade Indusrial e iberação Comercial no Brasil Pedro Cavalcani Ferreira e Osmani Teixeira de Carvalho Guillén 45 Opimal Moneary Policy, Gains from Commimen, and Inflaion Persisence André Minella 46 The Deerminans of Bank Ineres Spread in Brazil Tarsila Segalla Afanasieff, Priscilla Maria Villa hacer and Márcio I. Nakane 47 Indicadores Derivados de Agregados Moneários Fernando de Aquino Fonseca Neo e José Albuquerque Júnior 48 Should Governmen Smooh Exchange Rae Risk? Ilan Goldfajn and Marcos Anonio Silveira 49 Desenvolvimeno do Sisema Financeiro e Crescimeno Econômico no Brasil: Evidências de Causalidade Orlando Carneiro de Maos 50 Macroeconomic Coordinaion and Inflaion Targeing in a Two-Counry Model Eui Jung Chang, Marcelo Kfoury Muinhos and Joanílio Rodolpho Teixeira 5 Credi Channel wih Sovereign Credi Risk: an Empirical Tes Vicorio Yi Tson Chu 5 Generalized Hyperbolic Disribuions and Brazilian Daa José Fajardo and Aquiles Farias 53 Inflaion Targeing in Brazil: essons and Challenges André Minella, Paulo Springer de Freias, Ilan Goldfajn and Marcelo Kfoury Muinhos 54 Sock Reurns and Volailiy Benjamin Miranda Tabak and Solange Maria Guerra 55 Componenes de Curo e ongo Prazo das Taxas de Juros no Brasil Carlos Hamilon Vasconcelos Araújo e Osmani Teixeira de Carvalho de Guillén 56 Causaliy and Coinegraion in Sock Markes: he Case of ain America Benjamin Miranda Tabak and Eduardo José Araújo ima 57 As eis de Falência: uma Abordagem Econômica Aloisio Araujo 58 The Random Walk Hypohesis and he Behavior of Foreign Capial Porfolio Flows: he Brazilian Sock Marke Case Benjamin Miranda Tabak 59 Os Preços Adminisrados e a Inflação no Brasil Francisco Marcos R. Figueiredo e Thaís Poro Ferreira 60 Delegaed Porfolio Managemen Paulo Couinho and Benjamin Miranda Tabak Jun/00 Aug/00 Aug/00 Se/00 Sep/00 Se/00 Sep/00 Sep/00 Sep/00 Nov/00 Nov/00 Nov/00 Dec/00 Dez/00 Dec/00 Dez/00 Dec/00 5
6 O Uso de Dados de Ala Freqüência na Esimação da Volailidade e do Valor em Risco para o Ibovespa João Maurício de Souza Moreira e Eduardo Facó emgruber 6 Taxa de Juros e Concenração Bancária no Brasil Eduardo Kiyoshi Tonooka e Sérgio Mikio Koyama 63 Opimal Moneary Rules: he Case of Brazil Charles ima de Almeida, Marco Aurélio Peres, Geraldo da Silva e Souza and Benjamin Miranda Tabak 64 Medium-Size Macroeconomic Model for he Brazilian Economy Marcelo Kfoury Muinhos and Sergio Afonso ago Alves 65 On he Informaion Conen of Oil Fuure Prices Benjamin Miranda Tabak 66 A Taxa de Juros de Equilíbrio: uma Abordagem Múlipla Pedro Calhman de Miranda e Marcelo Kfoury Muinhos 67 Avaliação de Méodos de Cálculo de Exigência de Capial para Risco de Mercado de Careiras de Ações no Brasil Gusavo S. Araújo, João Maurício S. Moreira e Ricardo S. Maia Clemene 68 Real Balances in he Uiliy Funcion: Evidence for Brazil eonardo Soriano de Alencar and Márcio I. Nakane 69 r-filers: a Hodrick-Presco Filer Generalizaion Fabio Araújo, Mara Balar Moreira Areosa and José Alvaro Rodrigues Neo 70 Moneary Policy Surprises and he Brazilian Term Srucure of Ineres Raes Benjamin Miranda Tabak 7 On Shadow-Prices of Banks in Real-Time Gross Selemen Sysems Rodrigo Penaloza 7 O Prêmio pela Mauridade na Esruura a Termo das Taxas de Juros Brasileiras Ricardo Dias de Oliveira Brio, Angelo J. MonAlverne Duare e Osmani Teixeira de C. Guillen 73 Análise de Componenes Principais de Dados Funcionais Uma Aplicação às Esruuras a Termo de Taxas de Juros Geúlio Borges da Silveira e Ocavio Bessada 74 Aplicação do Modelo de Black, Derman & Toy à Precificação de Opções Sobre Tíulos de Renda Fixa Ocavio Manuel Bessada ion, Carlos Albero Nunes Cosenza e César das Neves 75 Brazil s Financial Sysem: Resilience o Shocks, no Currency Subsiuion, bu Sruggling o Promoe Growh Ilan Goldfajn, Kaherine Hennings and Helio Mori Dez/00 Fev/003 Feb/003 Feb/003 Feb/003 Fev/003 Fev/003 Feb/003 Feb/003 Feb/003 Apr/003 Maio/003 Maio/003 Maio/003 Jun/003 6
76 Inflaion Targeing in Emerging Marke Economies Arminio Fraga, Ilan Goldfajn and André Minella 77 Inflaion Targeing in Brazil: Consrucing Credibiliy under Exchange Rae Volailiy André Minella, Paulo Springer de Freias, Ilan Goldfajn and Marcelo Kfoury Muinhos 78 Conornando os Pressuposos de Black & Scholes: Aplicação do Modelo de Precificação de Opções de Duan no Mercado Brasileiro Gusavo Silva Araújo, Claudio Henrique da Silveira Barbedo, Anonio Carlos Figueiredo, Eduardo Facó emgruber 79 Inclusão do Decaimeno Temporal na Meodologia Dela-Gama para o Cálculo do VaR de Careiras Compradas em Opções no Brasil Claudio Henrique da Silveira Barbedo, Gusavo Silva Araújo, Eduardo Facó emgruber 80 Diferenças e Semelhanças enre Países da América aina: uma Análise de Markov Swiching para os Ciclos Econômicos de Brasil e Argenina Arnildo da Silva Correa 8 Bank Compeiion, Agency Coss and he Performance of he Moneary Policy eonardo Soriano de Alencar and Márcio I. Nakane 8 Careiras de Opções: Avaliação de Meodologias de Exigência de Capial no Mercado Brasileiro Cláudio Henrique da Silveira Barbedo e Gusavo Silva Araújo 83 Does Inflaion Targeing Reduce Inflaion? An Analysis for he OECD Indusrial Counries Thomas Y. Wu 84 Speculaive Aacks on Debs and Opimum Currency Area: a Welfare Analysis Aloisio Araujo and Marcia eon 85 Risk Premia for Emerging Markes Bonds: Evidence from Brazilian Governmen Deb, 996-00 André Soares oureiro and Fernando de Holanda Barbosa 86 Idenificação do Faor Esocásico de Desconos e Algumas Implicações sobre Teses de Modelos de Consumo Fabio Araujo e João Vicor Issler 87 Mercado de Crédio: uma Análise Economérica dos Volumes de Crédio Toal e Habiacional no Brasil Ana Carla Abrão Cosa 88 Ciclos Inernacionais de Negócios: uma Análise de Mudança de Regime Markoviano para Brasil, Argenina e Esados Unidos Arnildo da Silva Correa e Ronald Oo Hillbrech 89 O Mercado de Hedge Cambial no Brasil: Reação das Insiuições Financeiras a Inervenções do Banco Cenral Fernando N. de Oliveira Jun/003 Jul/003 Ou/003 Ou/003 Ou/003 Jan/004 Mar/004 May/004 May/004 May/004 Maio/004 Dez/004 Dez/004 Dez/004 7
90 Bank Privaizaion and Produciviy: Evidence for Brazil Márcio I. Nakane and Daniela B. Weinraub 9 Credi Risk Measuremen and he Regulaion of Bank Capial and Provision Requiremens in Brazil A Corporae Analysis Ricardo Schechman, Valéria Salomão Garcia, Sergio Mikio Koyama and Guilherme Cronemberger Parene 9 Seady-Sae Analysis of an Open Economy General Equilibrium Model for Brazil Mira Noemi Saaka Bugarin, Robero de Goes Ellery Jr., Vicor Gomes Silva, Marcelo Kfoury Muinhos 93 Avaliação de Modelos de Cálculo de Exigência de Capial para Risco Cambial Claudio H. da S. Barbedo, Gusavo S. Araújo, João Maurício S. Moreira e Ricardo S. Maia Clemene 94 Simulação Hisórica Filrada: Incorporação da Volailidade ao Modelo Hisórico de Cálculo de Risco para Aivos Não-ineares Claudio Henrique da Silveira Barbedo, Gusavo Silva Araújo e Eduardo Facó emgruber 95 Commen on Marke Discipline and Moneary Policy by Carl Walsh Maurício S. Bugarin and Fábia A. de Carvalho 96 O que É Esraégia: uma Abordagem Muliparadigmáica para a Disciplina Anhero de Moraes Meirelles 97 Finance and he Business Cycle: a Kalman Filer Approach wih Markov Swiching Ryan A. Compon and Jose Ricardo da Cosa e Silva 98 Capial Flows Cycle: Sylized Facs and Empirical Evidences for Emerging Marke Economies Helio Mori e Marcelo Kfoury Muinhos 99 Adequação das Medidas de Valor em Risco na Formulação da Exigência de Capial para Esraégias de Opções no Mercado Brasileiro Gusavo Silva Araújo, Claudio Henrique da Silveira Barbedo,e Eduardo Facó emgruber 00 Targes and Inflaion Dynamics Sergio A.. Alves and Waldyr D. Areosa 0 Comparing Equilibrium Real Ineres Raes: Differen Approaches o Measure Brazilian Raes Marcelo Kfoury Muinhos and Márcio I. Nakane 0 Judicial Risk and Credi Marke Performance: Micro Evidence from Brazilian Payroll oans Ana Carla A. Cosa and João M. P. de Mello 03 The Effec of Adverse Supply Shocks on Moneary Policy and Oupu Maria da Glória D. S. Araújo, Mira Bugarin, Marcelo Kfoury Muinhos and Jose Ricardo C. Silva Dec/004 Dec/004 Apr/005 Abr/005 Abr/005 Apr/005 Ago/005 Aug/005 Aug/005 Se/005 Oc/005 Mar/006 Apr/006 Apr/006 8
04 Exração de Informação de Opções Cambiais no Brasil Eui Jung Chang e Benjamin Miranda Tabak 05 Represening Roomae s Preferences wih Symmeric Uiliies José Alvaro Rodrigues-Neo 06 Tesing Nonlineariies Beween Brazilian Exchange Raes and Inflaion Volailiies Crisiane R. Albuquerque and Marcelo Porugal 07 Demand for Bank Services and Marke Power in Brazilian Banking Márcio I. Nakane, eonardo S. Alencar and Fabio Kanczuk 08 O Efeio da Consignação em Folha nas Taxas de Juros dos Emprésimos Pessoais Eduardo A. S. Rodrigues, Vicorio Chu, eonardo S. Alencar e Tony Takeda 09 The Recen Brazilian Disinflaion Process and Coss Alexandre A. Tombini and Sergio A. ago Alves 0 Faores de Risco e o Spread Bancário no Brasil Fernando G. Bignoo e Eduardo Auguso de Souza Rodrigues Avaliação de Modelos de Exigência de Capial para Risco de Mercado do Cupom Cambial Alan Cosme Rodrigues da Silva, João Maurício de Souza Moreira e Myrian Beariz Eiras das Neves Inerdependence and Conagion: an Analysis of Informaion Transmission in ain Americas Sock Markes Angelo Marsiglia Fasolo 3 Invesigação da Memória de ongo Prazo da Taxa de Câmbio no Brasil Sergio Rubens Sancao de Souza, Benjamin Miranda Tabak e Daniel O. Cajueiro 4 The Inequaliy Channel of Moneary Transmission Mara Areosa and Waldyr Areosa 5 Myopic oss Aversion and House-Money Effec Overseas: an experimenal approach José. B. Fernandes, Juan Ignacio Peña and Benjamin M. Tabak 6 Ou-Of-The-Money Mone Carlo Simulaion Opion Pricing: he join use of Imporance Sampling and Descripive Sampling Jaqueline Terra Moura Marins, Eduardo Saliby and Josée Florencio do Sanos 7 An Analysis of Off-Sie Supervision of Banks Profiabiliy, Risk and Capial Adequacy: a porfolio simulaion approach applied o brazilian banks Theodore M. Barnhill, Marcos R. Souo and Benjamin M. Tabak 8 Conagion, Bankrupcy and Social Welfare Analysis in a Financial Economy wih Risk Regulaion Consrain Aloísio P. Araújo and José Valenim M. Vicene Abr/006 Apr/006 May/006 Jun/006 Jun/006 Jun/006 Jul/006 Jul/006 Jul/006 Ago/006 Aug/006 Sep/006 Sep/006 Sep/006 Oc/006 9
9 A Cenral de Risco de Crédio no Brasil: uma análise de uilidade de informação Ricardo Schechman 0 Forecasing Ineres Raes: an applicaion for Brazil Eduardo J. A. ima, Felipe uduvice and Benjamin M. Tabak The Role of Consumer s Risk Aversion on Price Rigidiy Sergio A. ago Alves and Mira N. S. Bugarin Ou/006 Oc/006 Nov/006 30