Asymmetries of the Exchange Rate Pass Through to Domestic Prices: The Case of Costa Rica

Abstract

By using a logistic smooth transition vector autoregressive model this paper examines whether the exchange rate had asymmetric effects on inflation in Costa Rica during the period 1991-2009. Three basic questions are tried to be answered: Is there any variable that significantly induces asymmetries on the exchange rate pass through? Do positive and negative shocks on exchange rate have symmetric effects on the price level? Is there any evidence that the size of the shocks determines the relative size of the impact on inflation of a given shock on the exchange rate? Among many variables, it is found that lagged change in oil prices is the most appropriate transition variable, which means that it induces the greatest asymmetric effects on the pass-through. On average, when this transition variable is above certain threshold level, the pass-through is two times higher. There is no strong evidence of sign or magnitude asymmetries, which means that the pass-through is expected to be essentially the same when there is a positive or a negative shock on the exchange rate and when such shocks are big or small