Inflation targeting and exchange rate pass-through in India: Lessons from international experience

Abstract

This paper surveys the existing literature on the relationship between inflation targeting (IT) and exchange rate pass-through (ERPT), with a focus on drawing lessons for future IT countries and estimating ERPT in India. The study finds that the main lessons emerging from the experience of IT in reducing pass-through are (a) monetary policy should focus on future inflation, (b) coordination between monetary and fiscal policy is important, and (c) IT is not a panacea. Furthermore, ERPT varies across countries and depends on the composition of the inflation index. The paper also presents a case study of Indian using Vector autoregression model. The study finds decline in ERPT during the IT period.

Keywords

• inflation targeting
• exchange rate pass-through
• monetary policy
• var