Exchange rate pass-through & management of inflation expectations in a small open inflation targeting economy

Muhammad Ali Nasir, Toan Luu Duc Huynh, Xuan Vinh Vo

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

In the context of inflation targeting, this study analyses the exchange rate pass-through (ERPT) to inflation expectations in a small open inflation targeting economy. We also augment the inflation expectations function with GDP, inflation, unemployment, fiscal stance, oil prices and money supply. Drawing on the data from May 1999 to Dec 2018 on the Czech Republic, which was the first developing country to adopt inflation targeting, our key results suggest that ERPT has significant implications for inflation expectations. Inflation expectations are also strongly influenced by actual inflation and past inflation expectations suggesting evidence of adaptive expectations. Economic growth, labour market outlook, money supply, oil price shocks and fiscal stance also showed a considerable impact on inflation expectations, though results varied in the short and long run. Our study contributes to the debate on ERPT and inflation targeting by reflecting on the inflation expectations channel.

Original languageEnglish
Pages (from-to)178-188
Number of pages11
JournalInternational Review of Economics and Finance
Volume69
Early online date5 May 2020
DOIs
Publication statusE-pub ahead of print - 5 May 2020
Externally publishedYes

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