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© 2021 International Monetary Fund
WP/21/132
IMF Working Paper
African Department
An Empirical Assessment of the Exchange Rate Pass-through in Mozambique
Prepared by Ari Aisen, Edson Manguinhane and Félix F. Simione1
Authorized for distribution by Alvaro Piris Chavarri
May 2021
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
Determining the magnitude and speed of the exchange rate passthrough (ERPT) to inflation has been of paramount importance for policy-makers in developed and emerging economies. This paper estimates the exchange rate passthrough in Mozambique using econometric techniques on a sample spanning from 2001 to 2019. Results suggest that the ERPT is assymetric, sizable and fast, with 50 percent of the exchange rate variations passing through to prices in less than six months. Policy-makers should continue to pursue low and stable inflation and develop a strong track record of prudent macroeconomic policies for the ERPT to decline.
JEL Classification Numbers: E31, F31
Keywords: Exchange rate, inflation, passthrough
Author’s E-Mail Address: aaisen@imf.org, emanguinhane@imf.org, fsimione@imf.org
Contents
I. Introduction
II. A survey of the literature
III. Data and Methodology
A. Data
B. Empirical Model Specification
C. Accounting for asymmetric effects
D. Accounting for inflation environment, financial crisis and monetary policy regime
IV. Empirical Results
A. Bounds F-test for Cointegration
B. Long-run and short-run estimates of ERPT and Asymmetric Effects
C. Exchange Rate Passthrough, Inflation Environment, Monetary Policy Regime and Financial Crisis
D. Robustness check
V. Conclusions
References
Appendix A: Tables
Appendix B: Figures
Figures
IV.1. Rolling Coefficients of Exchange Rate Passthrough to Domestic Prices
0.1. Research Variables Plots
0.2. CPI Responses to NEER, USDMZN, ZARMZN and Import Price Chocks
0.3. Plots of CUSUM and CUSUM Squares
Tables
IV-1. Cointegration Test – ARDL Bounds Test
IV-2. Estimated Long Run Elasticities using the ARDL Approach
IV-4. Long-Run ERPT Elasticities – Accounting for Inflation Environment
0–1. Descriptive Statistics
0–2. Augmented Dickey-Fuller and Philips-Perron Unit Root Tests
0–3. Short-Run ARDL-ECM Results
0–4. CPI Response to One Percent Shock of Exchange Rate and Import Prices
0–5. Variance Decomposition of CPI (in Percent)
0–6. Short-Run Exchange Rate Asymmetric Effects
0–7. Estimated Long Run Elasticities – Accounting for Financial Crisis Effects
0–8. Estimated Long Run Elasticities – Accounting for Monetary Policy Regime
0–9. Estimated Long Run Elasticities using the ARDL Approach (including Money Supply and Rainfall Index)
Authors would like to thank colleagues from the IMF, including the Mozambique country team, the Research Advisory Group in the African Department and the Capital and Monetary Markets Department, as well as colleagues from the Central Bank of Mozambique, for their helpful comments. We are also indebted to the excellent research assistance from Jose Eduardo Baena.