Revisiting the Exchange Rate Pass-through in Emerging Markets

This paper aims to investigate the links between exchange rate pass-through (ERPT) and monetary policy. We examine the degree of ERPT to consumer prices for 11 emerging markets (6 inflation targeters and 5 non-inflation targeters) using both multivariate cointegrated VAR (CVAR) and impulse responses derived from the vector error correction model (VECM). Results of cointegration analyses suggest that the degree of ERPT is lower in ITers than in non-ITers. Besides, the impulse response estimates at 48 months are extremely close to the cointegration estimates in IT countries compared to those non-IT countries. The adjustment process is fully completed during the considered time horizon in the impulse response analysis. This finding confirms the literature review on the importance of the inflation environment and the monetary policy credibility in determining ERPT. The level of ERPT tend to decline in the countries where monetary policy moved strongly towards stabilizing inflation.