Exchange Rate Pass-Through: Does Central Bank Credibility matter ?

Mercredi | 2020-09-17
Salle des thèses – 12h00


Abstract :This paper studies in two stages the effects of central bank credibility on exchange rate pass-through (ERPT) on 20 inflation targeting (IT) countries. In the first stage, using 60 months rolling window regression of inflation on nominal effective exchange rate is obtained time-varying ERPT in during 1979m1-2020m5. In the second stage a credibility loss index is computed to measure the importance of central bank past performance and its deviation from its target over a period that spans 29 years (1991-2019). A panel threshold (PTR) model is used to capture the non-linear effects of credibility loss index on ERPT. The findings show the existence of a positive relation between exchange rate and inflation in most of the developing countries, the existence of a non-linear effect of credibility loss on deviation of past inflation from target, and finally the existence of non-linear effects of credibility loss on ERPT for developing countries as two thresholds are identified. These findings suggest the importance of the central bank’s credibility (the asymmetric impact of credibility loss) on the ERPT in developing countries.