ABSTRACT Considering the complex linkages between exchange rate pass‐through, energy prices, and inflation, involving monetary policy interactions in inflation‐targeting and non‐targeting economies, we examine the effect of exchange rate pass‐through, the central bank's inflation management, and money on aggregate energy price for a sample of 25 countries using panel VAR and Bayesian VAR techniques. Results show that exchange rate pass‐through, inflation, oil prices, and liquidity are causally linked, with oil prices impacting inflation, liquidity, and policy rates. We also find that countries that enforce inflation targeting in monetary policy can better manage sudden inflation by a readjustment in policy rates. The findings have insightful consequences for policy‐making authorities.
Banerjee et al. (Sun,) studied this question.