Exchange Rate Pass-Through in Brazil : A Markov Switching DSGE Estimation for the Inflation Targeting Period

This paper investigates the nonlinearity of exchange rate pass-through in the Brazilian economy during the floating exchange rate period (2000-2018) using a Markov-switching new Keynesian DSGE model. We find evidence of two distinct regimes for the exchange rate pass-through and for the volatility of shocks to inflation. Under the so-called “normal” regime, the long-run pass-through to consumer prices inflation is estimated at near zero value, only 0.00057 percentage point given a 1% exchange rate shock. Comparatively, the expected pass-through under a “crisis” regime is of 0.1035 percentage point to inflation, for the same exchange rate shock. The Markov-switching (MS) model outperforms the fixed parameters model according to several comparison criteria. The results allowed us to identify the occurrence of four distinct cycles for the exchange rate pass-through during the inflation targeting period in Brazil