Exchange rate volatility and pass‐through to inflation in South Africa

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AbstractDoes the South African rand's relatively large volatility affect inflation? To shed some light on this question, a standard estimation technique of exchange rate pass‐through to inflation is extended to incorporate exchange rate volatility. Estimated results suggest that higher exchange rate volatility tends to increase core inflation but to a relatively limited extent in South Africa. The finding lends support to the policy of allowing the rand to float freely and work as a shock absorber, consistent with the nation's successful inflation targeting regime.