Exchange Rate Pass‐Through in Asia: Assessing the Relevance of the Inflation Targeting Framework

Abstract

This study aims to quantify a possible link between exchange rate pass‐through (ERPT) and inflation targeting framework (IT) while focusing on four Asian economies which have adopted IT during the period of 1990–2010 against a control group of non‐inflation targeters. By deploying a structural VAR model with non‐recursive contemporaneous restrictions imposed on covariance matrix, we identify the impulse response of domestic inflation to the shocks of exchange rate and world commodity prices. The empirical evidence suggests that ERPT is absent in Asian IT and non‐IT economies since 1990s. The adoption of IT has not led to change in ERPT for the group of IT economies compared to their own pre‐targeting period and the experiences of non‐targeters after 2000s which is accepted as the average adoption date. It has been found, however, that the movement in domestic inflation is predominantly explained by world commodity prices in the past and not by the depreciation of local currency in these economies.