Exchange rates, price levels, and inflation targeting: Evidence from Asian countries

This study examines how the adoption of inflation-targeting influenced exchange rate pass-through and volatility in four Asian countries -Indonesia, South Korea, the Philippines, and Thailand - over the sample period of January 1990 to June 2007. We find that adopting inflation targeting helped reduce pass-through in South Korea, and Thailand, while the results are less clear for Indonesia and the Philippines. Nevertheless, the findings indicate that inflation targeting caused a decline in exchange rate volatility in all four countries. The important lesson from the experiences of these Asian countries is that the adoption of inflation targeting contributes to achieving the ultimate goal of inflation stability through reducing exchange rate pass-through or variability.