pe (G. Rodriguez). 1 Throughout this paper the concept of exchange rate pass-through into prices (import, producer, or consumer prices) makes reference to the exchange rate variations' effect over the variations of the respective price index, provided that the former is due to an exchange rate shock. When the price index is not specified, it must be understood that the paper is referring to the exchange rate pass-through into the consumer prices. Journal of Macroeconomicsj o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / j m a c r oopen economies -such as Peru's -given that changes in the pass-through can affect both inflation forecasts and the effectiveness of monetary policy.Throughout this paper, the pass-through is regarded as a nonlinear phenomenon that depends, in particular, on the monetary policy scheme. Although, to the authors' knowledge, a comprehensive theory explaining how the monetary policy scheme conditions the magnitude of the pass-through does not exist, several papers are reviewed to shed light on this relationship. For this purpose, a dynamic stochastic general equilibrium model (DSGEM) -calibrated for a small open economy -is simulated. It is shown that when the central bank adopts IT, it becomes less responsive to exchange rate fluctuations, thus allowing for increased exchange rate volatility. This result is particularly relevant given that the theory of the currency denomination of international trade predicts that an increase in the exchange rate variance induces a decrease of the share of firms that set their prices in foreign currency. Finally, by using a formal definition for the passthrough, it is shown that the latter is directly dependent on this share. Consequently, it is concluded that adopting IT reduces the pass-through.In the empirical literature, Gagnon and Ihrig (2004) are amongst the first to suggest that decreased pass-throughs, observed in several countries, can be attributed to a greater commitment and credibility of central banks in maintaining low levels of inflation. Although they do not make an explicit connection between the greater commitment and credibility of central banks and IT, it is clear that these characteristics are fundamental to the implementation of this scheme. In their paper, they estimate the pass-through for 20 countries (7 of which adopted IT) for two subsamples: one with high inflation and another with low inflation. It is worth mentioning that the cut date that separates both sub-samples does not coincide with the adoption date of IT (in the case of the countries that adopted this regime). The results of Gagnon and Ihrig (2004), which are drawn from a uni-equational linear model, show that the pass-through decreased in most countries. Furthermore, although IT countries had, on average, a greater pass-through in the high inflation subsample, the result is reversed in the low inflation scenario. Finally, by means of instrumental variables, they estimate Taylor rules for all the countries considered and show that pass-thr...

In this paper we study how in ‡ation expectations are formed and whether these change due to the occurrence of policy shifts or structural breaks. We conduct 4 experiments with 75 inexperienced subjects, in which we ask them to predict future home in ‡ation and report con…dence intervals. At three points in time during our experiments, we also ask our participants to provide additional information regarding the uncertainty about their expectations. Our design allowed us to gather 6750 home in ‡ation point forecasts and con…dence intervals. We …nd that: (1) in ‡ation expectations are seldom rational; (2) our subjects generally ignore valuable information and, instead, tend to pay close attention to past trends; (3) the adoption of in ‡ation targeting increases the amount of subjects that forecast in a rational fashion and reduces the uncertainty about future in ‡ation; and (4) a recession reduces rationality among forecasters, yet induces them to expect in ‡ation to revert to its mean.