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

27 Pages Posted: 21 May 2019 Last revised: 29 May 2019

See all articles by Muhammad Ali Nasir

Muhammad Ali Nasir

Leeds Beckett University - Leeds Business School

Toan Luu Duc Huynh

Ho Chi Minh City University of Economics and Finance; WHU - Otto Beisheim School of Management

Xuan Vinh Vo

University of Economics Ho Chi Minh City; French-Vietnamese Center for Management Education (CFVG) in Ho Chi Minh City

Date Written: April 24, 2019

Abstract

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.

Keywords: Inflation Targeting, Exchange Rate Pass-Through, Oil Shocks, Monetary Policy, Money supply, Inflation, Inflation Expectations, Nonlinear ARDL, NKPC

JEL Classification: E24, E31, E43, E52, E58, E61, E62, D84

Suggested Citation

Nasir, Muhammad Ali and Huynh, Toan Luu Duc and Vo, Xuan Vinh, Exchange Rate Pass-Through & Management of Inflation Expectation in a Small Open Inflation Targeting Economy (April 24, 2019). Available at SSRN: https://ssrn.com/abstract=3377181 or http://dx.doi.org/10.2139/ssrn.3377181

Muhammad Ali Nasir (Contact Author)

Leeds Beckett University - Leeds Business School ( email )

Leeds Beckett University
University 9 Queen Square ,City Campus
Leeds, LS1 3HE
United Kingdom

Toan Luu Duc Huynh

Ho Chi Minh City University of Economics and Finance ( email )

59C Nguyen D├Čnh Chieu
6th Ward, District 3
Ho Chi Minh City, Ho Chi Minh 70000
Vietnam

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Xuan Vinh Vo

University of Economics Ho Chi Minh City ( email )

Ho Chi Minh City, Ho Chi Minh City
Vietnam

HOME PAGE: http://www.ueh.edu.vn

French-Vietnamese Center for Management Education (CFVG) in Ho Chi Minh City

91 Ba Thang Hai Street
District 10
Ho Chi Minh City
Vietnam

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