Exchange rates, price levels, and inflation targeting: Evidence from Asian countries

Abstract

This study examines how the adoption of inflation-targeting influenced exchange rate pass-through and volatility in four Asian countries (Indonesia, Korea, the Philippines, and Thailand) over the sample period of January 1990 to June 2007. We find that reforming policy by adopting inflation targeting generally helped reduce pass-through in Korea and Thailand, while the results are less clear in Indonesia and the Philippines. Still, the findings indicate that inflation targeting has caused a decline in exchange rate volatility in all four countries. The important lesson from the experiences of these Asian countries is that the adoption of inflation targeting contributes to achieving the ultimate goal of inflation stability through reducing exchange rate pass-through or variability.

The Relationship Between Exchange Rate and Inflation Targeting in Emerging Countries

“…These suggest a decrease in the extent of ERPT along the distribution chain. The results are in line with the previous findings (McCarthy, 2000;Hahn, 2003;Edwards, 2006;Faruqee, 2006;Prasertnukul et al, 2010). Besides, we observe in table 2 that the long-run passthrough depends both on the coefficients of ΔlnEt and the inflation inertia presented by the coefficients of ΔlnPt-1, ΔlnPt-1×FLT, ΔlnPt-1×DIT.…”

“…We can conclude that IT regime allows the decrease of ERPT. The results found go in line with Edwards (2006); Prasertnukul et al (2010) and Siregar and Goo (2008).…”

“…In this section, we investigate whether the pass-through effects have declined after the adoption of inflation targeting regime. For this purpose, we follow the studies of Campa and Goldberg (2005); Gagnon and Ihrig (2004); Edwards (2006) and Prasertnukul et al (2010). Our estimation procedure is based on autoregressive distributed lag (ARDL) model.…”

“…Following Edwards (2006) and Prasertnukul et al (2010) we try to evaluate the relationship between conditional exchange rate volatility and IT adoption for each country in our sample using the generalized autoregressive conditional heteroskedasticity (GARCH) model. …”

“…Following Prasertnukul et al (2010) we try to study the effect of inflation targeting on inflation volatility for each country for the period that spans from 1993M1 to 2013 M7. We use the generalized autoregressive conditional heteroskedasticity (GARCH) model.…”