Exchange rate pass-through to prices in Mexico: a regional analysis

Abstract

This paper examines the regional variation in the response of various consumer price índices (headline, core, services, and goods) to exchange rate changes over the period from January 2003 to September 2023. The findings indicate that, although a greater pass-through effect is observed in consumer price indices in regions proximate to the United States, the differences are not statistically significant, suggesting no evidence of heterogeneity in this pass-through effect between different regions. We employ local projections (LP) with an instrumental variable identification strategy, to generate estimates of exchange rate pass-through (ERPT) to consumer prices in Mexico. The estimates obtained through LP indicate that ERPT to consumer prices in Mexico is generally more pronounced in the goods indices, both at the national and regional levels, while services indices show less sensitivity to exchange rate fluctuations. The lack of significant heterogeneity in the response of prices to the exchange rate suggests that the Exchange rate channel of monetary policy is homogeneous across regions, indicating that policies to counteract pass-through do not need to be implemented at the regional level.