Advertisement

Monetary Policy Credibility and the Exchange Rate Pass-Through to Inflation

  • Eliphas Ndou
  • Nombulelo Gumata
  • Mthokozisi Mncedisi Tshuma
Chapter

Abstract

We estimate counterfactual VAR models to determine whether monetary policy credibility channel impacts the response of inflation to exchange rate depreciation shocks. We shut-off the policy credibility indicator channel to determine the counterfactual consumer price inflation response to exchange rate depreciation shock. Evidence shows that the counterfactual consumer price inflation rises more than the actual reaction. This suggests that high monetary policy credibility weakens the size of exchange rate pass-through to inflation. The monetary policy credibility has bigger dampening effects when inflation exceeds 6% than using the 3–6% band or below 6%. This implies the threat of elevated upside risk, from the exchange rate depreciation shock in influencing inflation developments, may not be that elevated if the role of the monetary policy credibility is considered in the policy discussion. The role of credibility of policy conduct on the exchange rate pass-through to inflation is therefore crucial in the minimisation of exchange rate pass-through to inflation.

References

  1. Bordo, M. D., & Siklos, P. L. (2014). Central bank credibility, reputation and inflation targeting in historical perspectives (NBER Working Chapters No. 20693). National Bureau of Economic Research.Google Scholar
  2. Bordo, M. D., & Siklos, P. L. (2015). Central bank credibility and reputation a historical exploration (NBER Working Chapters No. 20824). National Bureau of Economic Research.Google Scholar
  3. Carriere-Swallow, Y., Gruss, B., Magnud, N. E., & Valencia, F. (2016). Monetary policy credibility and exchange rate pass-through (IMF Working Chapters No. 16/240).Google Scholar
  4. De Mendonca, H. F., & Tiberto, B. P. (2017). Effect of credibility and exchange rate pass-through on inflation: An assessment for developing countries. International Review of Economics and Finance, 50(C), 196–244.CrossRefGoogle Scholar
  5. Kabundi, A., & Mlachila, M. (2018). Monetary policy credibility and exchange rate pass-through in South Africa (Working Paper No. 04 WP/18/04).Google Scholar
  6. Lopez-Villavicenzio, A., & Mignon, V. (2017). Exchange rate pass-through in emerging countries: Do the inflation environment, monetary policy regime and central bank behaviour matter? Journal of International Money and Finance, 79, 20–38.CrossRefGoogle Scholar
  7. Svensson, L. E. O. (2000). How should monetary policy be conducted in an era of price stability (NBER Working Chapter Series No. 7516).Google Scholar
  8. Taylor, J. B. (2000). Low inflation, pass-through, and the pricing power of firms. European Economic Review, 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