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Does Inflation Targeting Always Matter for the ERPT? A robust approach

Antonia López Villavicencio () and Marc Pourroy ()

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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: inflation targeting; exchange rate pass-through; propensity score matching; state-space model (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-02082568
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Published in Journal of Macroeconomics, Elsevier, 2019, 60, pp.360-377. ⟨10.1016/j.jmacro.2019.04.004⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02082568

DOI: 10.1016/j.jmacro.2019.04.004

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