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2.1 Exchange rate pass through (ERPT) defined. Exchange rate pass through is basically regarded as the extent to which fluctuations or changes in the exchange rate are mirrored or reflected into prices of goods and services (Ibrahim and lutfi 2015). Also ERPT is generally put into two stages, first from the exchange rate to imported goods prices and second from import prices to consumer and other goods. The investigation of pass-through started with the study of “law of one price” and the Purchasing Power Parity (PPP) literature Dornbusch (1985). The foundation of the theory on which the relationship between changes in prices and exchange rate changes is based started from the theory of purchasing power parity (PPP) which came from law of one price (LOOP) assuming that barriers to trade do not exist and no transport cost(J Aron et al 2014). The Law of One Price (LOOP) states that at equilibrium, the price of all the tradable goods in two international markets cannot differ when expressed in a uniform currency and if that happens we have a situation of a complete pass-through (J Taylor, (2000). 2.1.1 Determinants of exchange rate pass through 2.1.2. Pricing to market strategy Kara and Nelson (2003) explained this as a situation where price setters for imports are just worried to set prices which are equal to those in the domestic market they are going to sell disregard of the exchange rate changes and world price. Their pricing just need to make them competitive in the domestic market they will be supplying. Their model took imports as only consumer goods and it also doesn’t consider inputs used in the production line or intermediate goods. Since prices are set in order to match those of domestic goods, this implies that there is no pass through to talk about. According to this model of Gaulier et al., (2006), there is low sensitivity of import prices to changes in exchange rate and this is linked to the fact that export firms would have adjusted their prices in a manner just to maintain their level of competitiveness good in the destination market. The pricing to market does not hold for a market which is perfectly competitive since MR or prices have to be more than MC of production. When the margins of the exporting firms are positive then the model can be a sustainable strategy for exporting firms and in which case the pass through of the exchange rate changes to import and other local prices such as consumer and producer prices will be less than one. At the end of the day, the magnitude of the pass through will be affected by the ability of the exporting firms to absorb exchange rate change shocks into their profit margins. 2.1.3 Specific industry/market characteristic This determine pass through because that’s where the issues like the degree of competition in a market and the market share between foreign and domestic fall into. Dornbusch (1987), states that, the elasticity of import or export supply and demand, product substitutability and differentiation also play bigger role in determining pass through. Industries with imperfect competition happen to have large shares of imports and as a result of not being perfectly competitive as well, they may experience a wide range of pricing responses subscribing to changes in the exchange rate leading to great pass through effects, (Reyes, J, 2007). When imports control a bigger part of the domestic market, the scenario of exchange rate pass through will be very high since imports are constituting a large portion in the consumption basket. 2.1.4 Exchange rate pass through channels This part aim to point out the possible channels of pass through to import, producer, consumer and export prices. With the assumption of a freely floating exchange rate regime in place, just like as it is currently in South Africa. Theory stipulates that exchange rate changes influence the prices of all the tradable goods which are exports and imports. In this case, the theory specifies that either a depreciation or an appreciation of the exchange rate will result in a fall or a rise in the local price of imported goods and a decrease or increase in the foreign price of exports. The effects of exchange rate changes on local prices can be transmitted via direct and indirect channels. Hyder and Shah (2004). On another note Gomez (2012), argues that, exchange rate movements are transmitted to consumer prices via three channels (1) prices of imported consumption goods (2) domestically produced goods which are then priced in foreign currency (3) prices of imported inputs or intermediate goods. On 1 and 2 the effects of the changes in the exchange rate are more of direct since the shocks are from the import prices recorded at the dock. Then on the 3 there is no direct contact since inputs are not yet to be consumed but costs of production will be affected and then later consumption goods. However, from the evidence observed from the reached empirical literature, it’s almost a unanimous agreement that exchange rate pass through is not complete. Also there is another agreement which argues that pass through on import prices is higher than that on consumer prices. 2.1.5 Monetary policy credibility and exchange rate pass-through Mishkin, (2009) outlined that, when an economy adopts inflation targeting and start to monitor inflation levels from all angles it must then be worried to implement the elements stated below: *Increased accountability of the central bank so as to achieve those goals. 2.1.6 Inflation Targeting and Exchange rate pass through Empirical evidence has shown that pass through has been decreasing for the past decades especially in developed economies and coincidentally the inflation levels of these countries have been decreasing(Reginaldo Junior,2007). As a result of high inflation levels, most developing economies moved from controlling exchange rate to targeting inflation as a way to keep an eye on the prices of goods and services (Reginaldo Junior, 2007). Inflation targeting is the act when the primary objective of the central bank shifts to controlling the prices in a country. The literature assume that there is a relationship between inflation and exchange rate changes. Campa and Goldberg (2005), unveiled an empirical analysis which showed the link between low inflation and low ERPT in developed economies. This implies that when inflation is low or when inflation is kept low then ERPT can also be low. Hakura (2006) also provided the same evidence but his analysis was for the developing countries that adopted inflation targeting like Brazil. However, credibility gains for the central bank plays a vital role in keeping prices and inflation down. The overall conclusion is that two things are needed for the monetary policy to successfully keep ERPT down, these are, if the central succeeds in keeping inflation down and when there are credibility gains as well. 2.1.7 Currency choice and Exchange rate pass through (ERPT) Gopinath and Itskoki (2008), stated that in international trade, there are certain sectors of the economy that are dominated by dollar pricers and other sectors using non-dollar pricing. They gave examples of the animal, vegetable fats and oils as the markets that are mostly dominated by dollar pricings. On the other hand they saw the machinery and mechanic appliances as a market which is mostly denominated in non-dollars prices. The currency choices that are mostly made are either that one of using the local currency (local currency pricing) when paying for imports or paying the imports using the producer currency (producer currency pricing) (Atkeson, A and Burstein, 2008). Theoretically, exchange rate pass through is expected to be lower for those goods priced in local or destination market currency than to those priced using the producer currency. Neiman, B. (2007), saw currency choice as something closely linked to or tied to medium run pass through and not long-run pass through. Also he stated that when the frequency of adjusting prices is different between firms of the same sector, they will choose different currencies to price. In most instances, long-run pass through (LRPT) can be above 0.5 but however, if the medium-run pass through (MRPT) is 0.5 the firm will choose LCP. Mostly those firms that adjust their prices less frequently are most likely to set their prices using the producer currency. Gopinath and Itskoki (2008), concluded they work by saying that, when we have a case for firms in the denominated in producer currency pricing (PCP), those firms will have medium-run pass through (MRPT) than firms in a sector denominated by local currency pricing (LCP) but it must be noted that the LRPT for all firms in both sectors will be the same.
 * The central bank to be committed to price stability as the primary objective of its monetary policy
 * Inflation targets should be announced to the public.
 * Increased engagement with the public about the plans and goals of the institution