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Do Inflation Targeting Really Reduced Exchange Rate Pass-through?

Author

Listed:
  • Salsa Dilla

    (Department of Economics, Faculty of Economics and Management, Bogor Agricultural University, Indonesia,)

  • Noer Azam Achsani

    (School of Business, Bogor Agricultural University, Indonesia,)

  • Lukytawati Anggraeni

    (Department of Economics, Faculty of Economics and Management, Bogor Agricultural University, Indonesia.)

Abstract

Implementation of inflation targeting framework (ITF) on the behavior of exchange rate pass-though (ERPT) has been an important role in the last decade. A lot of countries have changed their exchange rate regimes and monetary policy framework. As the ITF being adopted, the role of exchange rate in influencing the inflation rate has decreased. The purpose of this research is to analyze the dynamics of ERPT before and after the implementation of ITF using data from countries. We also compare the results between high income countries and middle income countries. Using autoregressive distributed lag model for 19 countries (8 high income countries; 11 middle income countries), the finding showed mixed results regarding there is a reduction of ERPT after the adoption of ITF. On average, loss of pass-through happened both for high income and middle income countries. However, there was a significant difference on the average long-run ERPT - before and after ITF implementation - in middle income countries compared to high income countries. Thus, the adoption of ITF right after crises brought greater effect to price stability in middle income countries. New empirical findings were found, particularly from middle income countries, where there is a decrease in ERPT after the adoption of ITF in Indonesia and Thailand both in the short-run and in the long-run.

Suggested Citation

  • Salsa Dilla & Noer Azam Achsani & Lukytawati Anggraeni, 2017. "Do Inflation Targeting Really Reduced Exchange Rate Pass-through?," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 444-452.
    • Handle: RePEc:eco:journ1:2017-03-58
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    References listed on IDEAS

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    Cited by:

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    2. Harsha Paranavithana & Leandro Magnusson & Rod Tyers, 2020. "Transitions to inflation targeting: panel evidence," Applied Economics, Taylor & Francis Journals, vol. 52(59), pages 6468-6481, December.
    3. Yu Hsing, 2021. "Response of Domestic Prices to Exchange Rate Movements in Argentina," Business and Economic Research, Macrothink Institute, vol. 11(2), pages 218-226, June.
    4. Hiroyuki Taguchi & Jambaldorj Bolortuya, 2019. "Inflation Targeting and the Pass-through Effect in Mongolia," Business and Economic Research, Macrothink Institute, vol. 9(2), pages 57-71, June.
    5. Hernán Rincón-Castro & Pedro Rubiano-López & Lisseth Yaya-Garzón & Héctor M. Zárate-Solano, 2021. "Traspaso de la tasa de cambio a la inflación básica en Colombia: un análisis de parámetros cambiantes en el tiempo," Borradores de Economia 1177, Banco de la Republica de Colombia.
    6. Taguchi, Hiroyuki, 2019. "Inflation targeting and the pass-through effect: The case of Mongolia," MPRA Paper 92988, University Library of Munich, Germany.
    7. Mirza, Nawazish & Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Boubaker, Sabri, 2023. "Exchange rate pass-through and inflation targeting regime under energy price shocks," Energy Economics, Elsevier, vol. 124(C).
    8. Arshid Hussain PEER & Mirza Allim BAIG, 2023. "Inflation targeting and exchange rate pass-through in India: Lessons from international experience," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(1(634), S), pages 239-254, Spring.

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    More about this item

    Keywords

    Exchange Rate Pass-through; Inflation Targeting Framework; Loss of Pass-through;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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