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Exchange Rate Pass-Through to Domestic Prices under Different Exchange Rate Regimes

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  • Mirdala, Rajmund

Abstract

Responsiveness of exchange rates to external price shocks as well as their ability to serve as a traditional vehicle for a transmission of these shocks to domestic prices is affected by exchange rate arrangement adopted by monetary authorities. As a result, exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyze exchange rate pass-through to domestic prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. To provide more rigorous insight into the problem of exchange rate pass-through to the domestic prices in countries with different exchange rate arrangements we estimate models for two subsequent periods 2000-2007 and 2000-2012. Our results suggest that there are different patterns of exchange rate pass-through to domestic prices according to the baseline period as well as the exchange rate regime diversity.

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  • Mirdala, Rajmund, 2013. "Exchange Rate Pass-Through to Domestic Prices under Different Exchange Rate Regimes," MPRA Paper 53209, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:53209
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    2. Pınar GÖKTAŞ, 2019. "Asymmetric Transition Effects of the Exchange Rate on Consumer Prices in Turkey," Sosyoekonomi Journal, Sosyoekonomi Society, issue 27(42).
    3. Farhan AHMED & Muhammad OWAIS & Sandhya KUMARI & Rohit RAJJANI, 2018. "Exchange rate pass-through to macroeconomic indicators using Vector Auto Regression: Empirical evidence from Pakistan," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(616), A), pages 61-76, Autumn.
    4. Mirdala, Rajmund, 2015. "Exchange Rate Pass-Through in the Euro Area," MPRA Paper 68862, University Library of Munich, Germany.
    5. Zhu, Huiming & Chen, Xiuyun, 2019. "Asymmetric effects of oil prices and exchange rates on China’s industrial prices," Energy Economics, Elsevier, vol. 84(C).
    6. Montfaucon, Angella Faith & Sato, Kiyotaka & Shrestha, Nagendra & Parsons, Craig, 2021. "Exchange rate pass-through and invoicing currency choice between fixed and floating exchange rate regimes: Evidence from Malawi’s transaction-level data," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 562-577.
    7. Jiménez-Rodríguez, Rebeca & Morales-Zumaquero, Amalia, 2016. "A new look at exchange rate pass-through in the G-7 countries," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 985-1000.
    8. Zorobabel Bicaba & Zuzana Brixiov?? & Mthuli Ncube, 2014. "Capital Account Policies, Imf Programs And Growth In Developing Regions," William Davidson Institute Working Papers Series wp1085, William Davidson Institute at the University of Michigan.

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    Keywords

    exchange rate pass-through; inflation; VAR; Cholesky decomposition; impulse-response function;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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