Effect of credibility and exchange rate pass-through on inflation: An assessment for developing countries

This study examines, through a panel data analysis for 114 developing countries, the exchange rate pass-through on inflation and on its volatility and, in particular, how the central bank credibility affects this relationship. Based on the idea that credibility can be measured by the difference between the policymaker's plans and the public's beliefs about those plans, several indicators were built. The findings denote that central bank credibility is able to more than counteract the bad effects on inflation caused by the exchange rate pass-through and thus contribute to greater price stability in developing economies. In brief, for the case of monetary authorities committed to anchor inflation expectations there is a gain of credibility that works as a tool to eliminate the pass-through effect on inflation.