Department of Economics Discussion Paper, University of Kent 06,05
The paper presents evidence on exchange rate pass-through and the Fear of Floating hypothesis before and after Inflation Targeting for a set of developed and emerging market economies. We use a structural VAR model to estimate the effect of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. We then use several different methodologies to examine the existence of Fear of Floating practices. We observe a drastic reduction in direct foreign exchange market intervention after the adoption of Inflation Targeting. As the exchange rate pass-through still matters for the attainment of the inflation targets, Fear of Floating seems to play only a minor role for most economies in our sample.
Inflation Targeting Exchange Rate Pass-Through 'Fear of Floating'