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Does Trade Openness or Globalisation Matter for the Response of Inflation to Exchange Rate Depreciation Shocks?

  • Eliphas Ndou
  • Nombulelo Gumata
  • Mthokozisi Mncedisi Tshuma
Chapter

Abstract

We find a negative relationship between trade openness, inflation and the exchange rate pass-through (ERPT) to inflation. Positive shocks to the trade openness lower the ERPT, and the decline is much bigger due to a persistent shock compared to a non-persistent shock. This indicates the direct effects of trade openness on ERPT. The counterfactual analysis reveals that increased trade openness dampens the increase in inflation due to exchange rate depreciation shocks. The negative business confidence channel and subdued GDP growth post 2008Q4, amplified the dampening ability of positive shocks to trade-openness to lower the ERPT.

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Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Eliphas Ndou
    • 1
  • Nombulelo Gumata
    • 2
  • Mthokozisi Mncedisi Tshuma
    • 3
  1. 1.South African Reserve BankPretoriaSouth Africa
  2. 2.PretoriaSouth Africa
  3. 3.National Planning Commission SecretariatPretoriaSouth Africa

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