ABSTRACT
This chapter examines the exchange rate pass-through in the transition to low and stable inflation environments. It argues that debate between “hard pegs” and “floats” that the stability of nominal variables, among other issues, should play a key role since it affects the strength of exchange rate pass-through and thus the immediate benefits of flexible exchange rate arrangements. The case of Mexico is interesting since the country is still in the process of consolidating its macroeconomic stability, that is, in the transition to a low and stable inflation environment. The traditional reasoning in favour of one or the other regime used to be expressed in terms of price rigidities and the exposure of the economy to terms of trade shocks. The evidence presented in the previous subsection shows that the level of the exchange rate pass-through depends on the level of inflation.
