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Summary /
Abstract
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This article sets out to assess the performance of inflation targeting (IT) frameworks from the perspective of the pass-through effect of external price shocks into consumer price inflation, focusing on the four East Asian economies which have adopted IT, during the period of 1990-2009. We first examine their monetary policy rules to identify the IT implementation, and then investigate the linkage between inflation-responsive rules and pass-through rates, as suggested by Gagnon and Ihrig (2004). Our main findings are as follows. First, under the IT adoption, Korea has taken an inflation responsive rule in a forward-looking manner, while Indonesia and Thailand have adopted the rule in a backward-looking manner. Second, only Korea has lost pass-through under IT adoption, thereby showing the clear linkage between inflation-responsive rules and the loss of pass-through. Third, the sensitivity test of inflation expectations to import price shocks in Korea also supports this linkage. These findings imply that IT adoption, if conducted in a forward-looking manner, can be a resisting power against external price shocks, even in small, open, emerging market economies, as tested under the latest global financial crisis in Korea.
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Keywords
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inflation targeting, pass-through, East Asian emerging market economies, policy reaction function, inflation expectations |
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Remarks
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This is another (second) paper written by staff from Japan's Ministry of Finance that belittles the achievements of the Philippine IT regime. The first paper may be found in http://dv.data.ph/articles/display.php?id=95, co-written by the same principal author. It suffers from a partial equilibrium weakness, despite the use of an instrumental variables estimation. Besides, the policy interest rate used in the policy reaction function is the "money market rate" published in the IFS. The paper deserves to be critiqued.
Also available for downloading at:
- http://www.eaber.org/intranet/documents/102/2458/PRI_Taguchi_2010_3.pdf
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