Nonlinear exchange rate pass-through and monetary policy credibility: Evidence from Korea

Abstract

Applying a smooth transition vector autoregression model with survey expectation data, we investigate the nonlinear effects of exchange rate shocks on inflation across monetary policy credibility states in Korea. We find that the impact of the exchange rate shocks is statistically larger in the low credibility regime, particularly in the short run. Our findings suggest that monetary policy credibility plays a significant role in maintaining for price stability in Korea.