Persistent and Non-Persistent Exchange Rate Depreciation Effects on Inflation
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Is there a threshold beyond which exchange rate depreciations are no longer beneficial to price and macroeconomic stability? What are the policy implications of zero and nonzero thresholds of exchange rate depreciation for the response of inflation to exchange rate shocks, and do the effects depend on whether the shock is persistent or not? In this chapter we conduct the analysis of the exchange rate depreciation effects by considering (i) a zero threshold, (ii) the 9 per cent threshold equivalent to R1/US$ established by the modified Balke (2000) VAR approach and the median box whisker plot, and (iii) the 15 per cent equivalent to R1.65/US$, which is 75th percentile in box whisker plot annual rand changes.
Evidence shows that inflation rises very much to rand depreciation shock in depreciation regimes than in an appreciation regime. The rand depreciation shock leads to elevated inflation pressures. There are asymmetric exchange rate effects above 15 per cent rand depreciation threshold. Peak inflation responses are bigger in absolute value to rand depreciation shock than to an appreciation shock. Thus policymakers should expect the inflation to remain slightly elevated above the threshold due to depreciation shock compared to inflationary pressure subsiding to an appreciation shock.