Document Type : Original Research


1 Department of Economics, Mazandaran University, Babolsar, Iran

2 Visiting Researcher in Orleans University, France


This paper sheds a new light on the role of central bank credibility (CBC) in explaining the extent of exchange rate pass-through (ERPT) in two stages. In the first stage, using 60 months rolling window regression of the inflation on the nominal effective exchange rate is obtained time-varying ERPT during 1990m1-2020m1. Once the credibility index (deviation of average of past inflation from target) is computed over a period of 29 years (1991-2019), in the second stage, the sample of 19 inflation targeting (IT) economies are split into different regimes with regard to the credibility values by using a Panel Threshold Regression (PTR) model. Our empirical result shows that there is one threshold point for CBC which is well identified by the data, allowing me to split my sample into two credibility regimes. When CBC level is below a threshold of 35% within a high-inflation environment, the extent of the ERPT coefficient is found to be higher. However, with the shift towards high-credibility regime, when credibility level is exceeding the threshold of 35%, the level of pass-through is significantly declining in the IT countries. This finding sheds further light on how the credibility gained through the commitment to the targets can be effective on the performance of the central bank and would ensure the better control of the pass-through.


Main Subjects


©2021 The author(s). This is an open access article distributed under the terms of the Creative Commons Attribution (CC BY 4.0), which permits unrestricted use, distribution, and reproduction in any medium, as long as the original authors and source are cited. No permission is required from the authors or the publishers.

Alain Kabundi, A., & Mlachil, M. (2019). The role of monetary policy credibility in explaining the decline in exchange rate pass-through in South Africa. Economic Modelling, 79, 173–185.
Albagli, E., & Klaus Schmidt-Hebbel. (2004). By How Much and Why do Inflation Targeters Miss Their Targets? Mimeo, Central Bank of Chile.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev. Econ. Stud, 58 (2), 277–297.
Arratibel, O., Furceri, D., Martin, R., & Zdzienicka, A. (2011). The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries. Economic Systems, 35, 261–277.
Barhoumi, K. (2006). Differences in long run ERPT into import prices in developing countries: An empirical investigation. Economic Modelling, 23, 926–951.
Barro, R., & Gordon.G. (1983). (), “Rules, Discretion and Reputation in a Model of Monetary Policy. Journal of Monetary Economics, 12 (1), 101-21.
Ben Cheikh, N., & Ben Zaied,Y. (2020). Revisiting the pass-through of exchange rate in the transition economies: New evidence from new EU member states. Journal of International Money and Finance 100, 102093.
Ben Cheikh, N., & Louhichi, W. (2014). Revisiting the role of inflation environment in the exchange rate pass-through: a panel threshold approach. FIW Working Paper.
Ben Cheikh, N., & Louhichi, W. (2016). Revisiting the role of inflation environment in exchange rate pass-through: A panel threshold approach. Economic Modelling, 52, 233–238.
Blinder, A. (1998). Central Banking in Theory and Practice. MIT Press, Cambridge MA and London.
Blinder, A. (2000). Central-bank credibility: Why do we care? How do we build it? American Economic Review, 90(5), 1421–1431.
Bomfim, A., & Rudebusch, G. (2000). Opportunistic and deliberate disinflation under imperfect credibility. Journal of Money, Credit and Banking, 32(4), 707–721.
Candelon, B., Colletaz, G, & Hurlin, C. (2013). Network Effects and Infrastructure Productivity in Developing Countries. Oxford Bulletin of Economics and Statistics, 75(6), 0305-9049.
Casselli, F., & Roitman, A. (2016). Non-linear exchange rate pass-through in emerging markets. IMF Working Paper 16/1.
Cecchetti, S., & Krause, S. ( 2002). Central bank structure, policy efficiency, and macroeconomic performance: exploring empirical relationships. Federal Reserve Bank of St. Louis Review, (84), 99–117.
Chou K, W. (2019). Re-examining the time-varying nature and determinants of exchange rate pass-through into import prices. North American Journal of Economics and Finance, 49, 331–351.
Cukierman, A., & Meltzer, A. (1986). A theory of ambiguity, credibility and inflation under discretion and asymmetric information. Econometrica, 54(5), 1099–1128.
De Mendonca, H. (2007). Towards credibility from inflation targeting: the Brazilian experience. Applied Economics, 39(20), 2599–2615.
De Mendonca, H. (2018). Credibility and Inflation Expectations: What we can tell from seven emerging economies? Policy Modeling, 40 (6), 1165-1181.
De Mendonca, H., & de Guimaraes e Souza, G. (2009). Inflation targeting credibility and reputation: The consequences for the interest rate. Economic Modelling, 26(6), 1228–1238.
De Mendonca, H., & Tiberto, B. (2017). Effect of credibility and exchange rate pass-through on inflation: An assessment for developing countries. International Review of Economics and Finance, 50, 196–244.
De Mendonça, H., & Tostes, F, S. (2015). The Effect of Monetary and Fiscal Credibility on Exchange Rate Pass-Through in an Emerging Economy. Open Econ Rev, 26, 787–816.
Dornbusch, R. (1987). Exchange Rates and Prices. the American Economic Review, 77(1), 93-106.
Dovern, J., Fritsche, U, & Slacalek, J. (2012). Disagreement among forecasters in G7 countries. Rev. Econ. Stat, 94 (4), 1081–1096.
Gagnon, J., & Ihrig, J. (2004). Monetary policy and exchange rate pass-through. Int. J. Finance Econ, 9 (4), 315–338.
Hansen, B. E. (1999). Threshold effects in non-dynamic panels: estimation, testing and inference. Journal of Econometrics, 93, 345–368.
Levieuge, G., Lucotte, Y., & Ringuedé, S. (2018). Central bank credibility and the expectations channel: evidence based on a new credibility index. Rev World Econ, 154, 493-535.
Neuenkirch, M., & Tillmann, P. (2014). Inflation targeting, credibility, and non-linear Taylor rules. Journal of International Money and Finance, 41, 30–45.
Roger, S. (2009). Inflation Targeting at 20: Achievements and Challenges’ . IMF Working Paper.
Shintani, M., Terada-Hagiwara, A, & Tomoyoshi, Y. (2013). Exchange rate pass-through and inflation: a nonlinear time series analysis. Int. Money Finance, 32, 512–527.
Taylor, J. (2000). Low inflation, pass-through, and the pricing power of firms. Eur. Econ. Rev, 44 (7), 1389–1408.