IT Countries: A Breed Apart? The Case of Exchange Rate Pass-Through

Abstract

This paper estimates the effects of two monetary policy strategies in the exchange rate pass-through (ERPT). To this end, we employ propensity score matching and consider the adoption of a target by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we show that inflation target has helped in reducing the ERPT, with older regimes more successful than younger ones. However, a de facto flexible exchange rate regime has not noticeable advantages to reduce the extent to which exchange rate fluctuations contribute to inflation instability.

Inflation target and (a)symmetries in the oil price pass-through to inflation

“…inflation target, leads to different outcomes than the absence of treatment, by matching treated observations with control observations that share similar characteristics other than the presence of the treatment. That is, we construct a counterfactual for the treatment, based on a set of observable characteristics to guarantee that we are comparing the "comparables" (see Lopez-Villavicencio and Pourroy (2017)). Furthermore, we distinguish between oil prices increases and decreases and contrast the results in each case.…”