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Does Inflation Targeting decrease Exchange Rate Pass-through in Emerging Countries?

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  • Coulibaly, D.
  • Kempf, H.

Abstract

In this paper, we empirically examine the effect of inflation targeting on the exchange rate pass-through to prices in emerging countries. We use a panel VAR that allows us to use a large dataset on twenty-seven emerging countries (fifteen inflation targeters and twelve inflation nontargeters). Our evidence suggests that inflation targeting in emerging countries contributed to a reduction in the pass-through to various price indexes (import prices, producer prices and consumer prices) from a higher level to a new level that is significantly different from zero. The variance decomposition shows that the contribution of exchange rate shocks to price fluctuations is more important in emerging targeters compared to nontargeters, and the contribution of exchange rate shocks to price fluctuations in emerging targeters declines after adopting inflation targeting.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 303.

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Length: 28 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bfr:banfra:303

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Keywords: Inflation Targeting; Exchange Rate Pass-Through; panel VAR.;

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  1. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2004. "Large Devaluations and the Real Exchange Rate," CEPR Discussion Papers 4810, C.E.P.R. Discussion Papers.
  2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  3. repec:nbr:nberwo:12876 is not listed on IDEAS
  4. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2002. "Why Are Rates of Inflation So Low After Large Devaluations?," NBER Working Papers 8748, National Bureau of Economic Research, Inc.
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Cited by:
  1. Brun-Aguerre, Raphael & Fuertes, Ana-Maria & Phylaktis, Kate, 2012. "Exchange rate pass-through into import prices revisited: What drives it?," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 818-844.
  2. María Lorena Marí del Cristo & Marta Gómez-Puig, 2012. "“Pass-through in dollarized countries: should Ecuador abandon the U.S. Dollar?”," IREA Working Papers 201216, University of Barcelona, Research Institute of Applied Economics, revised Oct 2012.
  3. International Monetary Fund, 2011. "Improving the Monetary Policy Frameworks in Central America," IMF Working Papers 11/245, International Monetary Fund.
  4. Zhi Yu, 2013. "Exchange rate pass-through, firm heterogeneity and product quality: a theoretical analysis," Globalization and Monetary Policy Institute Working Paper 141, Federal Reserve Bank of Dallas.

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