Nonlinear exchange rate pass-through in Mexico

This paper aims to investigate if the exchange rate pass-through (ERPT) to consumer prices follows a nonlinear behavior in Mexico. To look for nonlinearities, we employ a Threshold VAR approach (TVAR). The threshold allows us to differentiate regimes of "high" or "low" depreciation and the effect of exchange rate movements onto prices in each of these regimes. Our results suggest the existence of nonlinearities in Mexico only for the merchandise inflation measure, including the food and non-food subindices, with an estimated threshold that varies from an annual depreciation rate of 7.20 to 7.30 percent. Even though we find that these ERPT coefficients differ between regimes from a statistical point of view, the effect over headline inflation is small. Our results are consistent with the consolidation of a low ERPT in Mexico.