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THE RELEVANCE OF PASS-THROUGH EFFECT: SHOULD WE REVISIT MONETARY POLICY REGIME?

Christian Pinshi () and Emmanuel Sungani
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Emmanuel Sungani: UNIKIN - University of Kinshasa

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Abstract: This paper aims to examine the relationship between exchange rate changes and domestic prices in DR. Congo, more particularly to measure the level of exchange rate pass-through to inflation from January 2002 to March 2017. Applying a cointegration and using a vector error correction model, the main finding is that a change in exchange rate will affect inflation more than proportionally, the level of pass-through being relatively high. One per cent of currency depreciation increases prices index of 0.38 per cent in the short run. This effect is larger in the long run where the increase in prices index is 1,66%. Furthermore, the adjustment towards equilibrium will take time (12 months and 2 weeks). As main implication, Congolese's monetary authority must, on the one, be careful and closely monitor exchange rate behaviour so as to take a prompt monetary policy action and stem inflation pressure from the external sector by targeted exchange rate market interventions and, on the other, rethink intermediate targets by adopting hybrid targeting : (i) monetary targeting and (ii) implicit and flexible exchange rate targeting.

Keywords: Nominal exchange rate; inflation; pass-through; monetary policy; error-correction model; Taux de change nominal; politique monétaire; modèle a correction d’erreur (search for similar items in EconPapers)
Date: 2018
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-02566800
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Published in International Journal of Economics, Business and Management Research, Alicon Publications, 2018, 2 (2), pp.224-240

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