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Exchange Rate Passthrough Effects and Inflation Targeting in Emerging Economies: What is the Relationship?

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  • Javier Reyes

Abstract

Several studies have shown that over the past 10 years the passthrough effect from currency depreciation into domestic inflation has been decreasing in emerging economies that adopted inflation targeting (IT) during the mid and late 1990s. Therefore the nominal exchange rate effect on domestic inflation is becoming less of an issue for these countries. The literature has offered different explanations for these declines but so far they have not been directly related to the adoption of IT. This paper shows that lower passthrough effects can also be the result of the implementation of an IT regime and argues, contrary to previous studies, that the effects of the nominal exchange rate on inflation are still a relevant issue for emerging IT countries. The reason for this is that the empirical evidence offered for the lower passthrough misses the nature of the relationship between inflation and the nominal exchange rate under IT. Copyright � 2007 The Author; Journal compilation � 2007 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 15 (2007)
Issue (Month): 3 (08)
Pages: 538-559

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Handle: RePEc:bla:reviec:v:15:y:2007:i:3:p:538-559

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Cited by:
  1. Mallick, Sushanta & Marques, Helena, 2012. "Pricing to market with trade liberalization: The role of market heterogeneity and product differentiation in India’s exports," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 310-336.
  2. Aliyu, Shehu Usman Rano & Englama, Abwaku, 2009. "Is Nigeria Ready for Inflation Targeting?," MPRA Paper 14870, University Library of Munich, Germany, revised 26 Apr 2009.
  3. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2011. "Macroprudential Regulation and the Monetary Transmission Mechanism," Working Papers Series 254, Central Bank of Brazil, Research Department.
  4. Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
  5. Ivan Mendieta Muñoz, 2013. "El modelo de objetivos de inflación y el efecto pass-through en América Latina," Revista de Economía Crítica, Asociación de Economía Crítica, vol. 15, pages 5-30.
  6. Paul Castillo & Luis Maertens Odria & Gabriel Rodríguez, 2011. "Does The Exchange Rate Pass-Through Into Prices Change When Inflation Targeting Is Adopted? The Peruvian Case Study Between 1994 And 2007," Documentos de Trabajo 2011-314, Departamento de Economía - Pontificia Universidad Católica del Perú.
  7. Nogueira Jr., Reginaldo P. & León-Ledesma, Miguel A., 2009. "Fear of Floating in Brazil: Did Inflation Targeting matter?," The North American Journal of Economics and Finance, Elsevier, vol. 20(3), pages 255-266, December.
  8. Sek, Siok Kun, 2008. "Interactions between monetary policy and exchange rate in inflation targeting emerging countries: the case of three East Asian countries," MPRA Paper 12034, University Library of Munich, Germany, revised 09 Dec 2008.

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