Exchange rate pass-through: a comparative analysis of inflation targeting & non-targeting ASEAN-5 countries

Abstract

In the context of the debate on Exchange Rate Pass-Through (ERPT) under inflation targeting regimes, this study analysis the ERPT in inflation targeting and non-targeting economies of ASEAN-5. Employing a Non-linear Autoregressive Distributed Lag (N-ARDL) framework on data from 2000: Q1 to 2019 Q:4, our key empirical findings suggest that the exchange rate shocks do lead to significant changes in inflation. There is also prima facie evidence of asymmetric effects of exchange rate shocks in Singapore, Philippines, and Indonesia and the results varied between and among inflation targeting and non-targeting countries. The results also varied in the short and long-terms, whereas in the long-run, asymmetric effects of real exchange rate persist only for Indonesia and Singapore. Regardless of the inflation targeting or non-targeting regime, oil price shocks are found to be the most crucial factor with the largest impact on inflation in ASEAN-5 economies. Money supply and output growth also found to have some effect on inflation, though the results varied among countries. Our findings have profound implication for monetary policy formulation and price stability.