Monetary Policy Credibility and the Time-Varying Exchange Rate Pass-Through to Consumer Price Inflation

  • Eliphas Ndou
  • Nombulelo Gumata
  • Mthokozisi Mncedisi Tshuma


This chapter examines, the extent to which monetary policy credibility impacts the time varying exchange rate pass-through (ERPT) to consumer price inflation. We establish that the correlation between the growth of nominal effective exchange rate (NEER) and inflation has declined or weakened over time. In addition, the ability of the exchange rate to explain movements in inflation has weakened over time. The repo rate tightening shock lowers the ERPT and the correlation between the NEER changes and inflation. Evidence shows that the decline in ERPT is due to improved credibility of monetary policy conduct and keeping inflation within the 3–6% band. This concurs with the Taylor (European Econ Rev 44:1389–1408, 2000) hypothesis which links declines in ERPT and low inflation environment.


  1. Aleem, A., & Lahiani, A. (2014). Monetary policy credibility and exchange rate pass-through: Some evidence from emerging countries. Economic Modelling, 43, 21–29.CrossRefGoogle Scholar
  2. Choudhri, E. U., & Hakura, D. S. (2001). Exchange rate pass-through to domestic prices: Does the inflationary environment matter? (IMF Working Chapter No. 01/94).Google Scholar
  3. Devereux, M. B., & Yetman, J. (2002, November). Price setting and exchange rate pass-through: Theory and evidence. Price adjustment and monetary policy. In Proceedings of a conference held at the Bank of Canada. Ottawa: Bank of Canada.Google Scholar
  4. Gagnon, J. E., & Ihrig, J. (2004). Monetary policy and exchange rate pass-through. International Journal of Finance and Economics, 9, 315–338.CrossRefGoogle Scholar
  5. Levin, A., Natalucci, F., & Piger, J. (2004). The macroeconomic effects of inflation targeting. Federal Reserve Bank of St. Louis Reviews, 86(4), 51–80.Google Scholar
  6. Taylor, J. B. (2000). Low inflation, pass-through and the pricing power of firms. European Economic Reviews, 44(7), 1389–1408.CrossRefGoogle Scholar

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

Personalised recommendations