ANALYSING THE EXCHANGE RATE-INFLATION NEXUS: EVIDENCE FROM MAURITIUS

Abstract

This paper examines the degree and speed of exchange rate passthrough (ERPT) to the inflation rate in Mauritius from 1980 to 2016 using dynamics regression analysis. Results reveal that the long-run ERPT elasticity to domestic inflation is incomplete and low. However, no such relationship is discovered in the short run. The speed of adjustment of actual inflation to its long-run equilibrium level is quite high and it takes approximately two years to attain that level. From a policy point of view, domestic inflation can be tamed by tightening the domestic money supply and maintaining exchange rate stability in the long run