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Does inflation targeting always matter for the ERPT? A robust approach

López-Villavicencio, Antonia and Marc Pourroy ()
Authors registered in the RePEc Author Service: Antonia López Villavicencio ()

Journal of Macroeconomics, 2019, vol. 60, issue C, 360-377

Abstract: This paper estimates the effects of different forms of inflation targeting (IT) in the exchange rate pass-through (ERPT). To this end, we first estimate the ERPT for a large sample of countries using state-space models. We then consider the adoption of an inflation targeting framework by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we confirm that the ERPT tends to be lower for countries adopting explicit IT. However, we uncover that older regimes, adopting a range or point with tolerance band and keeping inflation close to the target, outperform other IT regimes. We also show that IT is effective even with a relatively high inflation target or low central bank independence.

Keywords: Exchange rate pass-through; Inflation targeting; State-space model; Propensity score matching (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 C30 (search for similar items in EconPapers)
Date: 2019
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