Asymmetric Exchange Rate Pass-through: Evidence from Nonlinear SVARs

We study the response of headline inflation to exchange rate innovations in a nonlinear context, where we distinguish between positive (depreciation) and negative (appreciation) exchange rate shocks. For that purpose, we specify a nonlinear Structural Vector Autoregressive (SVAR) model and we compute asymmetric impulse response functions for headline inflation after exchange rate innovations. We introduce a bootstrap Monte Carlo routine that allows to compute the error bands for these nonlinear impulse responses. Results for the Peruvian economy exhibit a remarkable statistically significant asymmetry in the response of headline inflation, both on impact and on propagation. In absolute values, the effect of a depreciation shock after one year is about twice the size of that corresponding to an appreciation shock. Roughly speaking, the one-year exchange rate pass-through to prices is 20 percent under a depreciation and only 10 percent under an appreciation.