Exchange rate pass-through and inflation targeting regime under energy price shocks

Nawazish Mirza, Bushra Naqvi, Syed Kumail Abbas Rizvi and Sabri Boubaker

Energy Economics, 2023, vol. 124, issue C

Abstract: The global surge in energy costs poses a significant obstacle for the attainment of price stability by the central banks across the world. This obstacle is further magnified for the economies that adopt an inflation-targeting framework and a flexible exchange rate regime. To overcome this challenge, our study attempts to answer whether inflation targeting can achieve price stability if an exchange rate pass-through exists, especially in the presence of energy price shocks. The study uses secondary data from twenty-one inflation-targeting economies for the period 1997-2020 and applies the non-linear autoregressive distributive lag (NARDL) model to test the hypotheses empirically, considering the possible asymmetries. The results confirm that exchange rate depreciation increases domestic price levels, while exchange rate appreciation reduces them in the long run. The study also finds that rising energy prices contribute to higher inflation in inflation-targeting economies. These findings suggest that inflation-targeting economies face a serious challenge in maintaining their core price stability goal due to exchange rate pass-through especially during energy price shocks. The results invite authorities of IT economies to re-evaluate their policy framework that conveniently ignores exchange rate pass-through by requiring a mandatory floating exchange rate regime.

Keywords: Price level; Exchange rate pass-through; Inflation targeting; Energy prices (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F41 Q43 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Exchange Rate Pass-through and Inflation Targeting Regime under Energy Price Shocks (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:124:y:2023:i:c:s0140988323002591

DOI: 10.1016/j.eneco.2023.106761

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