Inflation Targeting and Pass-through Rate in East Asian Economies

Hiroyuki Taguchi () and Woong-Ki Sohn

Macroeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: This article sets out to assess the performance of inflation targeting (IT) frameworks from the perspective of the pass-through effect of external price shocks into consumer price inflation, focusing on the four East Asian economies which have adopted IT, during the period of 1990-2009. We first examine their monetary policy rules to identify the IT implementation, and then investigate the linkage between inflation-responsive rules and pass-through rates, as suggested by Gagnon and Ihrig (2004). Our main findings are as follows. First, under the IT adoption, Korea has taken an inflation responsive rule in a forward-looking manner, while Indonesia and Thailand have adopted the rule in a backward-looking manner. Second, only Korea has lost pass-through under IT adoption, thereby showing the clear linkage between inflation-responsive rules and the loss of pass-through. Third, the sensitivity test of inflation expectations to import price shocks in Korea also supports this linkage. These findings imply that IT adoption, if conducted in a forward-looking manner, can be a resisting power against external price shocks, even in small, open, emerging market economies, as tested under the latest global financial crisis in Korea.

Keywords: inflation targeting; pass-through; East Asian emerging market economies; policy reaction function; inflation expectations (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Date: 2010-01
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Inflation Targeting and the Pass-through Rate in East Asian Economies (2014)
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