Exchange Rate Pass-Through & Management of Inflation Expectation in a Small Open Inflation Targeting Economy

This study analyses the aspect of inflation expectations management in the context of inflation targeting by particularly focusing on the impact of exchange rate pass-through to inflation expectations in a small open 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 is the first developing country to adopted inflation targeting, our key results suggest that ERPT has significant implications for the inflation expectations. Inflation expectations are strongly influenced by the actual inflation and the past inflation expectations suggesting evidence of adaptive expectation. The 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