Exchange Rate Pass-Through Effects: A Disaggregate Analysis of Colombian Imports of Manufactured Goods

Abstract

Colombian monthly data covering the period from 1995:01 to 2002:11 and ECM, fixed and time-varying parameters and Kalman filter techniques are used in this paper to quantify the exchange rate pass-through effects on import prices within a sample of manufactured imports. Also, whether the foreign exchange and inflation regimes affect the degree of pass-through is evaluated. The analytical framework used was a mark-up model. The main finding is that the long-run pass-through elasticities for the industries in the sample are stable and go from 0.1 to 0.8 and the short-run ones are unstable and go from 0.1 to 0.7, supporting mark-up hypotheses, in contrast to the hypotheses of perfect market competition and complete pass-through. The findings also show evidence of the variability and different degrees of pass-trough among manufacturing sectors, which confirm the importance of using dynamic models and disaggregate data for an analysis of the pass-through. Both, the hypothesis that under a floating regime there is a low degree of pass-through and the hypothesis that a low inflation environment has the same result are not supported.Pass-through effects; PPP;Imperfect competition;Floating regime;Low inflation environment;Fixed parameter model; Time-varying parameter model; Kalman filtering.