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The Effect of Monetary and Fiscal Credibility on Exchange Rate Pass-Through in an Emerging Economy

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  • Helder Mendonça
  • Felipe Tostes

Abstract

This study relates to the literature on the exchange rate pass-through effect on inflation for developing economies under inflation targeting. The novelty concerns the investigation of the effect of both monetary and fiscal credibility on pass-through. The article addresses empirical evidence, based on the Brazilian experience, regarding the idea that high credibility might reduce the exchange rate pass-through on inflation. The findings suggest that although monetary credibility is relevant only for pass-through on inflation of market prices, fiscal credibility is an important tool to reduce the pass-through on both inflation and inflation expectations. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Helder Mendonça & Felipe Tostes, 2015. "The Effect of Monetary and Fiscal Credibility on Exchange Rate Pass-Through in an Emerging Economy," Open Economies Review, Springer, vol. 26(4), pages 787-816, September.
    • Handle: RePEc:kap:openec:v:26:y:2015:i:4:p:787-816
    DOI: 10.1007/s11079-014-9339-3
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    More about this item

    Keywords

    Pass-through; Fiscal credibility; Monetary credibility; Inflation targeting; E31; E52; E58; E62; E63;
    All these keywords.

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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