Monetary Policy Surprise, Exchange Rate Pass-Through and Inflation Persistence: A High-Frequency Evidence from Emerging Economies

Abstract

This study investigates the transmission mechanism linking unexpected monetary policy shocks, exchange rate movements, exchange rate pass-through, and inflation persistence in emerging economies. The analysis focuses on whether monetary policy surprises identified around central bank announcements generate immediate exchange rate adjustments and whether these exchange rate responses subsequently propagate into domestic prices and alter the persistence of inflation. The study develops an empirical framework that combines high-frequency identification of monetary policy surprises with dynamic estimates of exchange rate pass-through and inflation persistence. The empirical strategy distinguishes the immediate market response to unexpected monetary policy information from the subsequent transmission of exchange rate movements to consumer prices, thereby allowing the monetary policy shock, exchange rate channel, and inflation dynamics to be examined within an integrated framework. The empirical analysis uses observed macroeconomic and financial market data for a panel of emerging economies over a period determined by the availability and comparability of high-frequency monetary policy information. Monetary policy surprises are identified from financial market movements surrounding policy announcements, while exchange rates, consumer prices, inflation measures, and relevant macroeconomic indicators are incorporated to estimate the subsequent transmission process. Local projection methods are employed to trace the dynamic responses of exchange rates and inflation to identified monetary policy surprises. The analysis further examines whether exchange rate pass-through varies according to inflation conditions, exchange rate volatility, monetary policy regimes, and the prevailing macroeconomic environment. The study is designed to provide evidence on three interconnected dimensions of monetary transmission. First, it quantifies the immediate exchange rate response to unexpected monetary policy information. Second, it estimates the extent and timing of the subsequent exchange rate pass-through into domestic prices. Third, it evaluates whether exchange rate-mediated monetary policy shocks contribute to persistent inflation dynamics and whether this persistence differs across emerging economies and macroeconomic regimes. By integrating high-frequency monetary policy identification with medium-term price transmission and inflation persistence, the study provides an empirical framework for distinguishing the initial financial-market response from the slower propagation of monetary shocks through the price-setting mechanism. The findings are intended to contribute to the empirical literature on monetary transmission by clarifying the conditions under which exchange rates amplify, absorb, or transmit unexpected monetary policy disturbances into persistent inflationary dynamics.