Monetary policy credibility and exchange rate pass-through∗

Abstract

A long-standing conjecture in macroeconomics is that declines in exchange rate pass-through over the past three decades are in part due to improved monetary policy per-formance. In a large sample of emerging and advanced economies, we find evidence that a relatively more credi-ble monetary policy regime—measured by better-anchored inflation expectations—is associated with lower exchange rate pass-through to consumer prices. The results are robust to con-trolling for the level and variability of nominal variables and for the import content of the consumption basket.