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Corresponding Author:
Smile Dube, Department of Economics, California State University Sacramento, CA, USA

Exchange Rate Pass-through (Erpt) and Inflation targeting (It): Evidence from South Africa

Volume 69 - Issue 2, May 2016
(pp. 121-150)
JEL classification: C22, E44, F31, F43, O11
Keywords: IT, ERPT, ARDL, Granger Causality, CPIX, Headline Inflation, PPI, Monetary Policy, DEIT, PITE


We use an ARDL model to estimate the short-run and the long-run effects of depreciation on consumer and producer prices. We find for price indices, foreign prices are only cointegrated when consumer and producer inflation are the dependent variable. Although economic theory suggests output as a proxy for domestic demand conditions, we find the output variable (measured in many ways) insignificant and thus it is not reported.

The results show that ERPT has declined significantly for producer inflation but not for consumer inflation after the adoption of IT. However, the reduction in ERPT is higher for producer prices than consumer prices. The lack of a significant decline of consumer inflation with ERPT during the period associated with targeting inflation opens the monetary policy debate to alternative monetary policy goals discussed briefly in the paper.

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