A microeconomic model of imperfect Cournot competition is used to derive an explicit endogenous relationship between price level and the nominal exchange rate. We obtain a mark-up that varies endogenously with consumer real income. Using the model, the estimated pass-through –namely the impact of devaluation on inflation– ranges between 9-11% in the short run and between 21-32% in the long run for the period 1986-2001. However, the data supports a structural change in 1991, after which the pass-through coefficient declines significantly. Moreover, contrary to conventional wisdom, we find no evidence of procyclical pass-through.
Noton, C. (2016). The pass-through from depreciation to inflation: Chile 1986-2001. Estudios De Economía, 30(1), pp. 133–155. Retrieved from https://estudiosdeeconomia.uchile.cl/index.php/EDE/article/view/40847
