Monetary Policy Credibility and Exchange Rate Pass-Through°

Abstract

A long-standing conjecture in macroeconomics is that declines in exchange rate pass-through over the past three decades are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence that a relatively more credible monetary policy regime-measured by better-anchored inflation expectations-is associated with lower exchange rate pass-through to consumer prices. The results are robust to controlling for the level and variability of nominal variables and for the import content of the consumption basket.