Early-Life currency crises and exchange rate pass-through: Understanding the impact of central Bankers’ formative years in Africa

Abstract

This study creates a novel dataset to explore the impact of past exposures to currency crises on the exchange rate pass-through (ERPT) to inflation for 26 African countries between 1989 and 2020. We posit that central bankers who have encountered currency crises during their formative years tend to develop more hawkish monetary preferences and exhibit greater risk aversion, thereby bolstering the credibility of monetary policy. Consequently, we hypothesize that past exposures to currency crises should be associated with smaller exchange rate pass-through elasticities. Our empirical analysis lends credence to this hypothesis; we find that as the number of exposures increases, there is a negative relationship between inflation and exchange rate pass-through for African central bankers who have experienced currency crises within the first 25 years of their lives. Furthermore, our findings remain robust even after controlling for measures of central bankers’ expertise, underscoring the enduring influence of early-life experiences on the ERPT-inflation nexus. Additionally, we find that, in an African context, past experiences exert a statistically significant impact on the exchange rate pass-through to inflation nexus compared to alternative measures of credibility, such as legal central bank independence, which do not have any effect.