Essays on asymmetric price transmission of international shocks in Brazil

Abstract

This thesis introduces two essays on the asymmetric transmission of international prices in the Brazilian economy. They are inspired by both society’s intuition and academic perception that price adjustment could be higher when they are positive. The first essay investigates the exchange rate pass-through (ERPT) to domestic prices. The work seeks to advance in the methodological field by bringing estimates drawn from different methods. Notably, we investigate if there are significant differences between slope-based parameters in simple regression models and dynamic impulse response functions obtained in system methods. Results indicate that the degree of ERPT and its asymmetry can vary on the methodological choice. Nonetheless, we demonstrate that the ERPT for consumer prices shows positive asymmetry for various models. In its decomposition, the prices said to be “administered” also have a more significant pass-through for depreciations. In the second essay, we study the asymmetric pass-through of international prices to wholesale fuel prices in Brazil. The motivation lies in the allegation of the country’s leading refining company that adjustments in fuel prices would follow international prices, like fuel, oil, and currency. The evidence gathered in a bunch of estimates shows signs of positive asymmetry in the transmission of global shocks to gasoline prices from July 2018 to June 2019. On the other hand, the price policy for diesel showed to be symmetric most of the time. When asymmetry was found, it was negative, meaning that decreases in international prices were being passed through more quickly, although this evidence is not constant across time and models. These findings suggest that the company might have more leeway to exert positive price asymmetry in the gasoline market. We hypothesise that the company could utilise its massive market power to keep prices above their equilibrium level