Impulse-Response Functions

Analysis: An application to the

Exchange Rate Pass-Through in
Mexico
Sylvia Beatriz Guillermo Peon
Facultad de Economia. Benemerita Universidad Autonoma de Puebla

Martin Alberto Rodriguez Brindis

Escuela de Economia y Negocios Universidad Anahuac Campus Oaxaca

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

Outline
Exchange Rate Pass-Through Definition
Time Series Frameworks and Estimation strategies for
Impulse-Response Functions
SVAR model Estimation
VEC model Estimation using Stata VEC command
VEC model Estimation using a Two-Stage Procedure

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

Definition
The Exchange Rate Pass-Through (ERPT) can be
understood as the degree to which exchange rate
changes are passed on into domestic prices along the
distribution chain.
Exchange rate shocks may affect prices at different
stages both directly as well as indirectly.
The conventional transmission mechanism of the
exchange rate works in two stages:
Stage 1: the exchange rate changes have a direct effect on
import prices
Stage 2: the mechanism works through its impact on producer
prices and consumer prices

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

Two Estimation Approaches for

IRFs
Our work presents an analysis of the ERPT mechanism for the
Mexican economy after the formal adoption of inflation targeting
(Jan 2001), using impulse-response functions (IRFs) as a tool to
estimate the degree and timing of the effect of exchange rate
depreciation changes on domestic prices
The analysis is carried out using two time series frameworks.
Recursive SVAR model: unlike the traditional VAR model, allows us to

impose restrictions on the contemporaneous and lagged matrices of

coefficients in order to improve estimation results.
VEC model: considers the possibility of valid cointegrating relationships

among the variables and allows us to incorporate the deviations from the
long run equilibrium) as explanatory variables when modeling the short run
behavior of the variables.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

Data Set
We use monthly observations of the following variables:
Oil price index (oilp)
Global Indicator of Economic Activity for Mexico (igae)
Nominal Exchange Rate Pesos/ USD (ex_rate)
Import price Index (impi)
Producer price Index (ppi)
Consumer price Index (cpi)
Nominal Interest Rate (i_rate)

Sources: IFS, INEGI and Banxico

Period of Analysis: 2001m1 to 2013m2
All series are I (1) except the Interest Rate, which is I (0): used ADFT
All series are expressed in natural logs except the Interest Rate

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

SVAR Model

Given that we have monthly observations, we use the twelveseasonal difference (or difference of order twelve) of each I(1)
variable; that is, for the k-th I (1) variable in the system (Stata Seasonal
Difference Operator S12.y):

The structural form model can be expressed as:

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

SVAR Model

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

SVAR Model

Normalization restrictions together with a Wold causal ordering (recursive

structure), provide the K(K+1)/2 necessary restrictions to uniquely identify the
structural shocks and impulse-responses (Just-identified SVAR). Thus, we can
define A as a lower triangular matrix:

This set of restrictions also ensure just-identified IRFs which are qualitatively
the same as the orthogonalized IRFs based on a Cholesky decomposition of
the variance-covariance matrix of the reduced form VAR disturbances.

However, we use an SVAR model in our study (Stata SVAR command)

because it allows us to place some additional short run constraints in
addition to the traditional recursive structure to help us improve the
estimation of the structural impulse-response functions (IRFs). In other words,
we estimate an overidentified SVAR model to analyze the structural IRFs.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

SVAR Model

The lag order of the model is 2 and it was chosen according to Akaike
Information Criterion (AIC) and Final Prediction Error (FPE) criterion (Ltkepohl
(2005, pp 152)
In small samples, AIC and FPE may have better properties (choose the correct order

more often).
Models based on these criteria may produce superior forecasts, because AIC and FPE
are designed for minimizing the forecast error variance, in small as well as large samples.

Before placing any constraints (on matrix A and/or on the underlying VAR), we
tested for residual autocorrelation using LM test (Stata command: varlmar)

Note: when used after SVAR with constraints

valmar shows only zeros and ones for the
chi2-statistic and p-values respectively

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

SVAR Model
Restrictions on the underlying VAR parameters
The aim of this estimation stage is to specify an underlying VAR model containing
all necessary right-hand side variables and as parsimonious as possible; a model
which could also help us to improve the accuracy of the implied impulseresponses
We used sequential elimination of regressors procedure suggested in Brggemann et al

(2003) and Ltkepohl (2005).

The procedure involves testing zero restrictions on individual coefficients (to eliminate lags of
variables of the underlying VAR) in each of the seven equations.
At each step of the procedure a single regressor was sequentially eliminated in one equation
if its corresponding P-value was higher than 0.1
66 insignificant regressor were eliminated in the model.

Checking Model Stability

Note: varstable command may not be used after fitting
An overidentified SVAR model.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

SVAR Model

Over identifying restrictions on the matrix of contemporaneous effects A

were determined following a procedure similar to the sequential
elimination of regressors.These additional zero restrictions correspond
to setting

Note: Using stata SVAR, this implies a definition of matrix A in the following way:
matrix A = (1,0,0,0,0,0,0\0,1,0,0,0,0,0\.,0,1,0,0,0,0\.,0,.,1,0,0,0\.,0,.,.,1,0,0\.,.,.,.,.,1,0\.,0,.,0,0,.,1)

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

SVAR Model: Results

Responses to a one-percent Exchange Rate Depreciation Shock
svar2, dln_exrate, dln_cpi

svar2, dln_exrate, dln_exrate

svar2, dln_exrate, dln_impi

svar2, dln_exrate, dln_ppi

.04
.03
.02
.01
0

.04
.03
.02
.01
0
0

10 12 14 16

18 20 22 24

10

12 14 16 18 20

22 24

step
95% CI

structural irf

Graphs by irfname, impulse variable, and response variable

Note:
Stata does not compute cumulative Structural IRFs
Stata does not compute bootstrap standard errors for overidentified structural VAR models. However, the structural IRFs
and forecast-error variance decompositions were estimated using the small-sample correction for the maximum likelihood
estimator of the underlying VAR disturbances variance-covariance matrix (see Stata Time-Series Reference Manual).

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

SVAR Model: Results

Cumulative Responses to a one-percent change in Exchange Rate depreciation

Note:
Stata does not compute cumulative Structural IRFs
Because structural shocks are standardized to one-percent shock, the vertical axis in the figures indicates the
estimated percentage point change in the respective response variable due to a one-percent shock, after s periods.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

SVAR Model : Results

Cumulative Pass-Through Elasticity

The CPTE at period s is the ratio of the cumulative response of the

corresponding price index inflation to the cumulative response of the
exchange rate depreciation, both evaluated s periods after the exchange rate
Pass-through degree to import prices is the highest
shock (Capistrn, et al 2011).

and it occurs immediately, with an impact elasticity

(at s = 0) very close to one. It remains quite high
(0.903), implying an almost complete ERPT at this
stage of the distribution chain.
The impact effect of the pass-through on producer
prices is about 0.11 which increases to 0.17 after
nine months and decreases thereafter. By month 18
after the shock, 13.3 percent of the exchange rate
depreciation is passed on into producer prices and it
stays the same afterwards.
The CPTE of consumer prices is zero on impact
and one month after the exchange rate shock. It
barely increases to 0.026 after four months and
because inflation responses to the exchange rate
depreciation are zero thereafter, the elasticity of
consumer prices ends up being 0.015 implying that
only 1.5 percent of the exchange rate depreciation
is passed on into consumer prices.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model

The VEC approach uses the Cholesky decomposition of the residual variance
covariance matrix by imposing some necessary restrictions so that causal
interpretation of the simple IRFs is possible. If cointegration exists, estimation
of the IRFs provides a tool to identify when the effect of a shock to the
exchange rate is transitory and when it is permanent.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model

Exploring graphically some possible cointegrating relations

Starting the estimation process by selecting the lag-order

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model

vecrank stata command to determine the number of cointegrating

equations
. vecrank oilp igae_s ex_rate impi ppi cpi i_rate if time>=tm(2001m7), trend(rtrend) lags(2)
Johansen tests for cointegration
Trend: rtrend
Number of obs =
Sample: 2001m7 - 2013m2
Lags =
maximum
rank
0
1
2
3
4
5
6
7

parms
56
70
82
92
100
106
110
112

LL
3380.4367
3412.624
3439.3949
3456.5343
3467.6735
3475.1093
3480.1689
3481.7194

eigenvalue
.
0.36860
0.31781
0.21718
0.14712
0.10078
0.06973
0.02191

140
2

5%
trace
critical
statistic
value
202.5653
146.76
138.1909
114.90
84.6490*
87.31
50.3702
62.99
28.0919
42.44
13.2201
25.32
3.1009
12.25

Case 2: No linear trends

in the differenced data
(trends in levels are linear
but NOT quadratic)
and linear trend in
cointegrating equations
(cointegrating equations
are trend stationary)

. vecrank oilp igae_s ex_rate impi ppi cpi i_rate if time>=tm(2001m7), trend(rconstant)
Johansen tests for cointegration
Trend: rconstant
Number of obs =
Sample: 2001m7 - 2013m2
Lags =
maximum
rank
0
1
2
3
4
5
6
7

parms
49
63
75
85
93
99
103
105

LL
3353.3722
3391.2838
3417.5048
3432.6352
3443.8631
3450.78
3455.2083
3458.161

eigenvalue
.
0.41818
0.31243
0.19438
0.14820
0.09409
0.06130
0.04130

5%
trace
critical
statistic
value
209.5776
131.70
133.7543
102.14
81.3124
76.07
51.0516*
53.12
28.5958
34.91
14.7619
19.96
5.9054
9.42

140
2

Case 4: NO linear trends

in the levels of the data
and cointegrating
equations stationary
around a constant mean.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model

Unrestricted Estimation (no contraints on alfa and beta) was carried out
with rtrend and rconstant

Stability and autocorrelation tests were also performed :

Model versions are stable: there are only K-r = 7-3 = 4 unit moduli and the remaining

are less than 1. However, the estimated model with no linear trend in the levels of the
variables, shows one additional moduli of 0.97, indicating that the rtrend model is
better.
Found evidence of autocorrelation for lag orders 1 and 2. So we included one more lag
in the estimation process.
. vecstable, graph
Eigenvalue stability condition

The VECM specification imposes 4 unit moduli.

1
.5

.2373584i
.2373584i
.4493658i
.4493658i
.4798507i
.4798507i
.5762072i
.5762072i
.1045511i
.1045511i
.1217736i
.1217736i
.1314984i
.1314984i
.2062843i
.2062843i

Roots of the companion matrix

. veclmar, mlag(6)

Imaginary
0

+
+
+
+
+
+
+
+
-

1
1
1
1
.885101
.885101
.883564
.883564
.631935
.631935
.580015
.580015
.431338
.431338
.352334
.352334
.297567
.297567
.226187
.226187
.129336

Lagrange-multiplier test

-.5

1
1
1
1
.8526805
.8526805
.7607602
.7607602
.4111996
.4111996
-.06635141
-.06635141
-.4184748
-.4184748
.330621
.330621
-.2669352
-.2669352
.0927761
.0927761
-.1293363

Modulus

-1

Eigenvalue

-1

-.5

0
Real

.5

The VECM specification imposes 4 unit moduli

lag

chi2

df

Prob > chi2

1
2
3
4
5
6

63.6236
66.9149
51.7154
44.6348
50.2668
64.1920

49
49
49
49
49
49

0.07819
0.04529
0.36825
0.65057
0.42303
0.07139

H0: no autocorrelation at lag order

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model : Results

The estimated cointegrating equations are the following:

Identification:

beta is exactly identified

Johansen normalization restrictions imposed

_ce1

_ce2

_ce3

beta

Coef.

Std. Err.

P>|z|

[95% Conf. Interval]

ppi
cpi
ex_rate
impi
oilp
igae_s
i_rate
_trend
_cons

1
-1.11e-16
(omitted)
-.368181
.0071384
-.28302
-.2627054
-.0020348
-1.513062

.
.

.
.

.
.

.
.

.
.

.033584
.0118649
.0783093
.1516362
.000329
.

-10.96
0.60
-3.61
-1.73
-6.19
.

0.000
0.547
0.000
0.083
0.000
.

-.4340045
-.0161163
-.4365033
-.5599069
-.0026795
.

-.3023575
.0303931
-.1295367
.0344961
-.00139
.

ppi
cpi
ex_rate
impi
oilp
igae_s
i_rate
_trend
_cons

-5.55e-17
1
-1.73e-18
-.0688288
.0416488
.1169235
-.6321417
-.0040413
-4.748528

.
.
.
.022502
.0079497
.0524687
.1015992
.0002204
.

.
.
.
-3.06
5.24
2.23
-6.22
-18.34
.

.
.
.
0.002
0.000
0.026
0.000
0.000
.

.
.
.
-.1129318
.0260677
.0140866
-.8312726
-.0044733
.

.
.
.
-.0247257
.0572299
.2197603
-.4330109
-.0036093
.

ppi
cpi
ex_rate
impi
oilp
igae_s
i_rate
_trend
_cons

-4.44e-16
-1.78e-15
1
-1.559882
.7249673
-1.77411
-6.545463
-.0007387
10.26017

.
.
.
.2749397
.0971331
.641088
1.241388
.002693
.

.
.
.
-5.67
7.46
-2.77
-5.27
-0.27
.

.
.
.
0.000
0.000
0.006
0.000
0.784
.

.
.
.
-2.098754
.5345899
-3.03062
-8.978538
-.0060169
.

.
.
.
-1.02101
.9153446
-.5176008
-4.112388
.0045394
.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Results

Estimation with overidentifying restrictions on beta (cointegrating parameters)

and restrictions on alfa (adjustment parameters) was carried out. However,
STATA estimation results indicate that beta is underidentified.

We used Stata dforce option to get the beta and alfa parameter estimates
when they are not identified.

LM test for identifying restrictions report chi2( 8) = 12.26 Prob > chi2 = 0.140
so restrictions are valid.

Stability test shows that the restricted model is stable, and veclmar command
cannot be used in this case because it requires that the parameters in the
cointegrating equations be exactly identified or overidentified.

Orthogonal Impulse-functions are estimated for both unrestricted and restricted

models.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Results

* DEFINING CONSTRAINTS ON
* COINTEGRATING PARAMETERS

* bconstraints
constraint 10 [_ce1]ppi = 1
constraint 11 [_ce1]cpi = 0
constraint 12 [_ce1]ex_rate = 0
constraint 13 [_ce1]oilp = 0
constraint 20 [_ce2]ppi = 0
constraint 21 [_ce2]cpi = 1
constraint 22 [_ce2]ex_rate = 0
constraint 30 [_ce3]ppi = 0
constraint 31 [_ce3]cpi = 0
constraint 32 [_ce3]ex_rate = 1

* DEFINING CONSTRAINTS ON
* ADJUSTMENT PARAMETERS
* aconstraints
constraint 103 [D_ppi]L1._ce3 = 0
constraint 201 [D_cpi]L1._ce1 = 0
constraint 402 [D_impi]L1._ce3 = 0
constraint 501 [D_oilp]L1._ce1 = 0
constraint 502 [D_oilp]L1._ce2 = 0
constraint 701 [D_i_rate]L1._ce1 = 0
constraint 703 [D_i_rate]L1._ce2 = 0

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Results

Identification:
( 1)
( 2)
( 3)
( 4)
( 5)
( 6)
( 7)
( 8)
( 9)
(10)

_ce1

_ce2

_ce3

beta is underidentified

[_ce1]ppi = 1
[_ce1]cpi = 0
[_ce1]ex_rate = 0
[_ce1]oilp = 0
[_ce2]ppi = 0
[_ce2]cpi = 1
[_ce2]ex_rate = 0
[_ce3]ppi = 0
[_ce3]cpi = 0
[_ce3]ex_rate = 1
beta

Coef.

ppi
cpi
ex_rate
impi
oilp
igae_s
i_rate
_trend
_cons

1
(omitted)
(omitted)
-.3867741
(omitted)
-.2682843
-.1549083
-.001845
-1.467958

ppi
cpi
ex_rate
impi
oilp
igae_s
i_rate
_trend
_cons

(omitted)
1
(omitted)
-.170387
.1519226
-.176478
-1.68635
-.0045418
-3.336873

ppi
cpi
ex_rate
impi
oilp
igae_s
i_rate
_trend
_cons

(omitted)
(omitted)
1
-2.639899
2.044834
-5.076288
-19.66606
-.0080073
25.86042

Std. Err.

P>|z|

[95% Conf. Interval]

.0389851

-9.92

0.000

-.4631834

-.3103647

.0805167
.1461662
.000359
.

-3.33
-1.06
-5.14
.

0.001
0.289
0.000
.

-.4260942
-.4413887
-.0025487
.

-.1104743
.1315721
-.0011413
.

.0682048
.0174384
.1506555
.2842763
.0006493
.

-2.50
8.71
-1.17
-5.93
-6.99
.

0.012
0.000
0.241
0.000
0.000
.

-.3040659
.117744
-.4717573
-2.243521
-.0058145
.

-.036708
.1861012
.1188014
-1.129179
-.0032691
.

.
.8264322
.2336303
1.850847
3.516928
.0079241
.

.
-3.19
8.75
-2.74
-5.59
-1.01
.

.
0.001
0.000
0.006
0.000
0.312
.

.
-4.259676
1.586927
-8.703881
-26.55911
-.0235382
.

.
-1.020121
2.502741
-1.448694
-12.77301
.0075236
.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Results

VECM: Response to a unit shock on the Exchange Rate
Restricted Model: vec3_R_rtrend, ex_rate, ex_rate

Restricted Model: vec3_R_rtrend, ex_rate, impi

Unrestricted Model: vec3_rtrend, ex_rate, ex_rate

Unrestricted Model: vec3_rtrend, ex_rate, impi

.02
.015
.01
.005
0

.02
.015
.01
.005
0
0

10 12 14 16 18 20 22 24

10 12 14

16 18 20 22 24

step
Graphs by irfname, impulse variable, and response variable

Note: Stata does not compute Std. Errors for OIRFs estimated with VECM

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Results

VECM: Responses to a unit shock on the Exchange Rate
vec3_R_rtrend, ex_rate, cpi

Restricted Model: vec3_R_rtrend, ex_rate, ppi

Unrestricted Model: vec3_rtrend, ex_rate, cpi

Unrestricted Model: vec3_rtrend, ex_rate, ppi

.002

.001

-.001

.002

.001

-.001
0

10

12 14 16 18 20 22 24

step
Graphs by irfname, impulse variable, and response variable

Note: PPI Response is very sensitive to constraints

10 12 14 16 18 20

22 24

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Results

Some inconveniences found (for our particular study) when estimating the
model using Stata VEC command:
If the order of the variables is important (as in our model) there could be a conflict with
Johansen normalization restrictions used by Stata vec command. Keeping the recursive
(Wold causal) order imposed in the SVAR model (if possible) becomes very difficult
because it implies to place several restrictions on the beta coefficients which easily lead to
convergence NOT achieved when maximizing the log-likelihood function.

Stata PDF documentation files specify as technical note:

vec uses a switching algorithm developed by Boswijk (1995) to maximize the loglikelihood when constraints are placed on the parameters. The starting values
affect both
the ability of the algorithm to find a maximum and its speed in finding that maximum.
Specifying starting values for BETA is complicated.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Results

Some inconveniences found (for our particular study) when estimating the
model using Stata VEC command:
IRFs results are very sensitive to constraints on cointegrating parameters.
IRFs are now estimated based on shocks to the levels of the variables, so these IRFs are
not directly comparable with the ones obtained with the SVAR model. The analysis must
be different under the two approaches.

The variables in differences are the simple first differences (not the seasonal differences
that we used with the SVAR model). First differences represent (in our model) monthly
growth rates, and we used annual growth rates with the SVAR.

We cannot asses the statistical significance of the IRFs because standard errors are not
computed when using vec command.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Two Stage Procedure

As alternative estimation approach we use a two-stage procedure.

We also follow Stata Time Series Manual two-step estimation method
suggested when using veclmar command for VECM when the
parameters of the cointegrating vectors (beta) are exactly identified
or overidentified.

This method requires to have explored reasonable cointegrating

relations, and requires to perform the corresponding stationarity tests
to verify that each cointegrating relation is I(0).

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Two Stage Procedure

Advantages:
We keep Wold causal ordering of variables
Can impose constraints on contemporaneous and underlying VAR parameters
and on adjustment parameters in order to improve estimation precision .
Can estimate Structural IRFs with corresponding Std. Errors

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Two Stage Procedure: Results

Responses to a one-percent Exchange Rate Depreciation Shock
svar2, dln_exrate, dln_exrate

svar2, dln_exrate, dln_impi

svec2, dln_exrate, dln_exrate

svec2, dln_exrate, dln_impi

.04
.03
.02
.01
0

.04
.03
.02
.01
0
0

10 12 14 16

18 20 22 24

10

step
95% CI
Graphs by irfname, impulse variable, and response variable

structural irf

12 14 16 18 20

22 24

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Two Stage Procedure

Responses to a one-percent Exchange Rate Depreciation Shock
svar2, dln_exrate, dln_cpi

svar2, dln_exrate, dln_ppi

svec2, dln_exrate, dln_cpi

svec2, dln_exrate, dln_ppi

.008
.006
.004
.002
0

.008
.006
.004
.002
0
0

10

12 14 16 18

20 22 24

10 12 14

step
95% CI
Graphs by irfname, impulse variable, and response variable

structural irf

16 18

20 22

24

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

VEC Model: Two Stage Procedure

.98

.9

.05

.92

.1

.94

.15

.96

.2

.25

Cumulative ERPT Elasticties of Prices along the distribution chain

10

12
step

E_ppi_SVAR
E_cpi_SVAR
E_impi_SVAR (right axis)

14

16

18

20

22

24

E_ppi_SVEC
E_cpi_SVEC
E_impi_SVEC (right axis)

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

Conclusions
The SVAR model over-estimates the size and persistence (except for consumer
price inflation) of responses to a one-percent Exchange Rate Depreciation shock.
However, the SVAR model under-estimates the CPT Elasticities. In other words,
the estimated percentage of the exchange rate depreciation that is passed on into
prices along the distribution chain is higher under the SVEC estimation approach.
The difference on CPTE between the two approaches is more evident for the
consumer price index. Ten months after the shock, the SVEC and SVAR models
estimate that 10% and 1.7% of the exchange rate depreciation is passed on into
consumer prices respectively. This implies that taking into account deviations from
the long-run equilibrium relationships in our ERPT analysis is important.

Impulse-Response Functions Analysis: An Application to the Exchange Rate Pass-Through in Mexico

References

Bruggemann, Ralf, Krolzig Hans-Martin and Ltkepohl, Helmut (2003). Comparison of

Model Reduction Methods for VAR processes. Economics Papers 2003-W13,
Economics Group, Nuffield College, University of Oxford.

Capistrn, Carlos, Ibarra-Ramirez, Ral and Ramos-Francia, Manuel. (2011). El

Traspaso de Movimientos del Tipo de Cambio a los Precios: Un Anlsis para la
Economa Mexicana. Banco de Mxico. Documentos de Investigacin. Working Paper
No. 2011-12.

Ltkepohl, Helmut. (2005). New Introduction to Multiple Time Series Analysis. SpringerVerlag.