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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.

Suggested Citation

  • Javier Reyes, 2007. "Exchange Rate Passthrough Effects and Inflation Targeting in Emerging Economies: What is the Relationship?," Review of International Economics, Wiley Blackwell, vol. 15(3), pages 538-559, August.
  • Handle: RePEc:bla:reviec:v:15:y:2007:i:3:p:538-559
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    References listed on IDEAS

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    1. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-validating optimum currency areas," Staff Reports 152, Federal Reserve Bank of New York.
    2. Campa, Jose M. & Goldberg, Linda S., 2002. "Exchange rate pass-through into import prices: A macro or micro phenomenon?," IESE Research Papers D/475, IESE Business School.
    3. Jiri Jonas & Frederic S. Mishkin, 2003. "Inflation Targeting in Transition Countries: Experience and Prospects," NBER Working Papers 9667, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Stewart Ngandu, 2008. "Exchange Rates And Employment," South African Journal of Economics, Economic Society of South Africa, vol. 76(s2), pages 205-221, August.
    2. Maertens Odria, Luís Ricardo & Castillo, Paul & Rodriguez, Gabriel, 2012. "Does the exchange rate pass-through into prices change when inflation targeting is adopted? The Peruvian case study between 1994 and 2007," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1154-1166.
    3. repec:eee:riibaf:v:41:y:2017:i:c:p:247-259 is not listed on IDEAS
    4. 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.
    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. 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.
    7. Felipe Santos Tostes & Helder Ferreira De Mendonça, 2016. "Credibility On Pass-Through In Brazil," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42ndd Brazilian Economics Meeting] 022, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    8. López-Villavicencio, Antonia & Mignon, Valérie, 2017. "Exchange rate pass-through in emerging countries: Do the inflation environment, monetary policy regime and central bank behavior matter?," Journal of International Money and Finance, Elsevier, vol. 79(C), pages 20-38.
    9. Devereux, Michael B. & Yetman, James, 2014. "Globalisation, pass-through and the optimal policy response to exchange rates," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 104-128.
    10. Kadria, Mohamed & Djelassi, Mouldi, 2012. "La Politique de Ciblage d’Inflation et “Pass-through” du Taux de Change : Une Analyse en Modèle Panel VAR dans le cadre des Pays Emergents
      [The Inflation Targeting Policy and Exchange Rate Pass-thr
      ," MPRA Paper 60721, University Library of Munich, Germany.
    11. repec:spt:admaec:v:7:y:2017:i:6:f:7_6_4 is not listed on IDEAS
    12. 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.
    13. Mallick, Sushanta & Marques, Helena, 2010. "Data frequency and exchange rate pass-through: Evidence from India's exports," International Review of Economics & Finance, Elsevier, vol. 19(1), pages 13-22, January.
    14. Michael B Devereux & James Yetman, 2014. "Responding to exchange rates in a globalised world," BIS Papers chapters,in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 97-117 Bank for International Settlements.
    15. 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.
    16. 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.
    17. repec:eee:reveco:v:51:y:2017:i:c:p:245-257 is not listed on IDEAS
    18. 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.

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