Exchange Rate Pass-Through to Prices in Mexico: A Study of the Main Border and Non-Border Cities

Abstract

This study analyzes the pass-through effect of the exchange rate on the Consumer Price Index (INPC) in border and 27 non-border metropolitan areas of Mexico during the period 2002-2019. The database uses monthly observations. An autoregressive vector model (VAR) is employed and includes formal employment and price indices for each analyzed city, interest rates, exchange rates, the U.S. price index, prices of energy commodities, and some control variables. Results indicate that from 2002 to 2016, the exchange rate affected border cities more intensely. Pass-through values increase when the period 2017-2019 is included, as these years are characterized by significant variations in gasoline prices, prior to its liberalization in December 2017. It is recommended that monetary authorities pay more attention to the inflation rate by geographic region. The originality of the study lies in its comparison of the country’s different geographical areas and its limitation in the lack of data for some of them. It can be concluded that the exchange rate is still a key factor in the Mexico-U.S. border region´s inflation.