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Monetary policy credibility and state-dependent exchange rate pass-through in Asia-Pacific countries

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  • Kwon, Janghan

Abstract

This paper investigates how exchange rate pass-through (ERPT) varies across monetary policy regimes in a panel of 11 Asia-Pacific countries. Monetary policy credibility is proxied by the dispersion of professional inflation forecasts. By identifying the monetary policy credibility regimes using the Hansen (1999) threshold test, I examine the nonlinear ERPT through state-dependent local projections. The results show that the magnitude of ERPT is considerably larger in times of lowered credibility. The results also highlight that central banks may face heightened ERPT, regardless of their monetary policy regime or level of economic development, especially in the short run. In particular, ERPT nonlinearities tend to be more pronounced in emerging market economies and during periods without an inflation targeting regime. I find evidence of asymmetric ERPT following currency appreciation and depreciation, with a higher pass-through rate observed when credibility weakens.

Suggested Citation

  • Kwon, Janghan, 2025. "Monetary policy credibility and state-dependent exchange rate pass-through in Asia-Pacific countries," Economic Modelling, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325001981
    DOI: 10.1016/j.econmod.2025.107203
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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