The Unassuming Economist

From a paper by Sini Sabu:

“This study examines the asymmetric relationship between real exchange rate fluctuations and household inflation expectations in India via ARDL and multiple threshold nonlinear autoregressive distributed lag (MTNARDL) models. The results indicate that inflation expectations respond significantly to exchange rate appreciation but are less sensitive to depreciation. A threshold analysis confirms that only substantial exchange rate deviations affect expectations, whereas minor fluctuations have negligible effects. Empirical evidence suggests that an appreciation of the real effective exchange rate by 10 units reduces inflation expectations by approximately 3.2 percentage points, whereas a similar depreciation results in only a 1.4 percentage point increase. These findings challenge the assumption of symmetric exchange rate pass-through and emphasize the importance of exchange rate stability in monetary policy formulation. Given the implications for inflation targeting, policymakers should prioritize exchange rate interventions that minimize excessive appreciation, while also strengthening communication strategies to manage inflation expectations more effectively.”