Exchange rate pass-through & management of inflation expectations in a small open inflation targeting economy

Muhammad Ali Nasir, Toan Luu Duc Huynh and Xuan Vinh Vo

International Review of Economics & Finance, 2020, vol. 69, issue C, 178-188

Abstract: In the context of inflation targeting, this study analyses the exchange rate pass-through (ERPT) to inflation expectations in a small open inflation targeting economy. We also augment the inflation expectations function with GDP, inflation, unemployment, fiscal stance, oil prices and money supply. Drawing on the data from May 1999 to Dec 2018 on the Czech Republic, which was the first developing country to adopt inflation targeting, our key results suggest that ERPT has significant implications for inflation expectations. Inflation expectations are also strongly influenced by actual inflation and past inflation expectations suggesting evidence of adaptive expectations. Economic growth, labour market outlook, money supply, oil price shocks and fiscal stance also showed a considerable impact on inflation expectations, though results varied in the short and long run. Our study contributes to the debate on ERPT and inflation targeting by reflecting on the inflation expectations channel.

Keywords: Exchange rate pass-through; Inflation targeting; Oil shocks; Monetary policy; Money supply; Inflation; Inflation expectations; Nonlinear ARDL; NKPC (search for similar items in EconPapers)
JEL-codes: D84 E24 E31 E43 E52 E58 E61 E62 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:69:y:2020:i:c:p:178-188

DOI: 10.1016/j.iref.2020.04.010

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