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Does Fiscal Policy Credibility Matter for the Exchange Rate Pass-Through to Consumer Price Inflation in South Africa?

  • Eliphas Ndou
  • Nombulelo Gumata
  • Mthokozisi Mncedisi Tshuma
Chapter

Abstract

We find that strong (weak) fiscal policy credibility leads to a significant exchange rate appreciation (depreciation), reduces (increases) inflation and lowers inflation expectations. Evidence based on the counterfactual VAR model shows that improvements in fiscal policy credibility neutralise the transmission of exchange rate depreciation shocks to inflation and inflation expectations especially in the high inflation regime. Thus, we conclude that strengthening fiscal policy credibility is needed to reduce the exchange rate pass-through to inflation and inflation expectations and this assists monetary policy authorities in achieving the price stability mandate.

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Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Eliphas Ndou
    • 1
  • Nombulelo Gumata
    • 2
  • Mthokozisi Mncedisi Tshuma
    • 3
  1. 1.South African Reserve BankPretoriaSouth Africa
  2. 2.PretoriaSouth Africa
  3. 3.National Planning Commission SecretariatPretoriaSouth Africa

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