Working Paper Series no. 303: Does Inflation Targeting decrease Exchange Rate Pass-through in Emerging Countries?

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.

Dramane Coulibaly and Hubert Kempf
October 2010

Classification JEL : E31, E52, F41.

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