A threshold vector autoregression model of exchange rate pass-through in Mexico

Considering nonlinearities in the exchange rate pass-through to domestic prices, 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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