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Do Economic Growth Regimes Impact the Pass-Through of Exchange Rate Shocks to Inflation?

  • Eliphas Ndou
  • Nombulelo Gumata
Chapter
  • 358 Downloads

Abstract

This chapter investigates the role of GDP regimes in the exchange rate pass-through (ERPT) to inflation. Evidence shows that GDP growth regimes introduce non-linearity in the response of inflation to rand depreciation. Furthermore, large rand depreciation shocks lead to higher inflation responses than small depreciation magnitudes. Monetary policy reacts to such depreciation shocks but the tightening is influenced by the magnitudes of the pass-through of the rand depreciation shocks to inflation. Large magnitudes of the exchange rate depreciation are accompanied by large inflation rate responses and aggressive monetary policy.

The policy implications of the evidence are that the pass-through of large exchange rate depreciations to inflation is neutralised to some degree by the low GDP growth regime. In addition the low exchange pass-through to inflation in the low GDP growth regime is consistent with the menu cost theory of price changes, which suggests that producers subjected to low demand often hesitate to change prices frequently and may absorb a significant portion of cost increases.

Keywords

Exchange Rate Pass-through (ERPT) Rand Depreciation Inflation Response Depreciation Shock Menu Cost Theory 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

References

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Copyright information

© The Author(s) 2017

Authors and Affiliations

  • Eliphas Ndou
    • 1
  • Nombulelo Gumata
    • 1
  1. 1.South African Reserve BankPretoriaSouth Africa

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