Exchange rate pass-through in emerging countries: Do the inflation environment, monetary policy regime and central bank behavior matter?. (December 2017)

• Record Type: Journal Article
• Authors: López-Villavicencio, Antonia; Mignon, Valérie
• Is Part Of: Journal of international money and finance. Volume 79(2017)
• Page Start: 20
• Page End: 38
• Publication Date: 2017-12
• Subjects: E31 -- E52 -- F31; Exchange rate pass-through -- Inflation -- Emerging countries -- Monetary policy; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2017.09.004
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: A declining pass-through to consumer prices is evidenced with more stable and anti-inflationary environment. Monetary policy regimes play a key role in explaining this diminishing pass-though. Transparency of monetary policy decisions reduces the pass-through to consumer prices. Uncertainty about domestic monetary policy does not strongly affect the pass-through to the price of imports. Abstract: In this paper, we estimate the exchange rate pass-through (ERPT) to import and consumer prices for a sample of 14 emerging countries over the 1994Q1-2015Q3 period. To this end, we augment the traditional bivariate relationship between the nominal effective exchange rate and inflation by accounting for monetary stability proxied by the inflation environment, monetary policy regime and central bank behavior. We show that both the level and volatility of inflation, as well as adopting an inflation target or the transparency of monetary policy decisions clearly reduce ERPT to consumer prices. However, uncertainty about domestic monetary policy seems less relevant in explaining the pass-through to the price of imports.