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Inflation Targeting and the Pass‐through Rate in East Asian Economies

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There has been serious debate regarding whether the inflation targeting (IT) framework for the emerging market economies has been an effective nominal anchor. Focusing on Korea, Thailand and the Philippines, this article aims to contribute to the debate by providing empirical evidence on a decline in the ‘pass‐through’ effect with IT adoption. Our main findings are as follows. First, under the IT framework, Korea has followed an inflation responsive rule in a forward‐looking manner, while Thailand has adopted the rule in a backward‐looking manner. Second, only Korea experiences a reduction in the pass‐through effect under IT adoption, thereby showing a linkage between the forward‐looking inflation responsive rule and the pass‐through effect. Finally, a test of the sensitivity of inflation expectations to external price shocks in Korea supports this linkage.
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Keywords: E52; East Asian economies; F31; F41; forward‐looking; inflation expectations; inflation targeting; pass‐through; policy reaction function

Document Type: Research Article

Publication date: June 1, 2014

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