The Impact of Monetary Regime on the Exchange Rate Pass-Through under Exchange Rate Volatility (Dynamic Panel Data Approach)

The main Purpose of this paper is to investigate the impact of monetary regime and exchange rate volatility on the exchange rate pass-through in two subsets of countries with the inflation targeting versus exchange rate as nominal anchor over the period of 1999-2010. To conduct this study, the empirical model has been estimated by dynamic panel data approach and GMM estimator. The main findings of this paper show that exchange rate volatility has positive effect on the import prices in the two groups of countries. In addition, the results of model estimation reveal that the interaction effect of monetary regime with nominal effective exchange rate has positive and negative effects on the import price index in the first and second group of countries respectively. The overall conclusion suggests that the impact of monetary regime on the exchange rate pass-through under exchange rate volatility is higher if it is accompanied with exchange rate anchor in comparing with inflation targeting strategy.