Does the Consumer Confidence Channel Affect the Response of Inflation to Exchange Rate Depreciation Shocks?
Evidence indicates the weak consumer confidence reduces the size of the exchange rate pass-through (ERPT) to consumer price inflation. In addition, evidence indicates that weak consumer and business confidence reduces the size of ERPT to consumer price inflation more than monetary policy credibility does. In policy terms, this evidence suggests, the size of inflationary pressures from the exchange rate depreciation shocks are much lower than they would be, when consumer confidence is weak. Therefore, the non-consideration of the influence of weak consumer confidence on the ERPT may lead to an upward bias on the projections of policy rate path.
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