Inflation targeting is increasingly seen as a crucial monetary policy by many economies in their quest for economic growth. The choice of an appropriate exchange rate regime, continue to be crucial in macroeconomic policy. Using data from 1970q1 to 2015q4, the paper examines the effects of inflation targeting on exchange rate pass-through. Applying a VAR model, the results show that inflation targeting has significant impacts on the movements of inflation, output and the exchange rate. The pass-through to consumer prices decreased and there was a reduction in the influence of foreign producer costs on imports prices after adopting inflation targeting.
JEL classification numbers: E31, E47, E52, F41
Keywords: Inflation targeting, Pass-Through, Prices, and Exchange rate