Sectoral Exchange Rate Pass-through to Manufacturing Prices: A GVAR Approach

This article produces estimates of exchange rate pass-through (ERPT) to import and wholesale prices considering the hypothesis of the existence of strategic interaction between local and foreign producers in the domestic market. We estimate a global vector autoregression (GVAR) model to address the unobservable common factor and the presence of global variables for 21 sectors of Brazilian manufacturing. This model internalizes that producer and import pricing is related within the sector, in addition to having an intersectorial relationship due to the linkage of the production chain. We estimate the aggregate ERPT for import and wholesale prices of 73% and 22% after twenty quarters of the shock, respectively. The results provided by the GVAR allow us to identify two different dynamics for the estimates of ERPT to import prices that are associated differently with the degree of the share of imports in sectors and the domestic market concentration. For approximately 50% of the manufacturing sectors considered, we have a more interdependent adjustment between foreign and domestic producers.