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Theoretical and Applied Economics
No. 1 / 2023 (634), Spring

Inflation targeting and exchange rate pass-through in India: Lessons from international experience

Arshid Hussain PEER
Jamia Millia Islamia, New Delhi, India
Mirza Allim BAIG
Jamia Millia Islamia, New Delhi, India

Abstract. This paper surveys the existing literature on the relationship between inflation targeting (IT) and exchange rate pass-through (ERPT), with a focus on drawing lessons for future IT countries and estimating ERPT in India. The study finds that the main lessons emerging from the experience of IT in reducing pass-through are (a) monetary policy should focus on future inflation, (b) coordination between monetary and fiscal policy is important, and (c) IT is not a panacea. Furthermore, ERPT varies across countries and depends on the composition of the inflation index. The paper also presents a case study of Indian using Vector autoregression model. The study finds decline in ERPT during the IT period.

Keywords: inflation targeting, exchange rate pass-through, monetary policy, VAR.

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