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The Impact of the USD/EUR Exchange Rate on Inflation in the Central and East European Countries

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  • Ljubinko Jankov

    (Croatian National Bank, Trg hrvatskih velikana 3, Zagreb 10002, Croatia.)

  • Ivo Krznar

    ([1] Croatian National Bank, Trg hrvatskih velikana 3, Zagreb 10002, Croatia.
    [2] Zagreb School of Economics and Management, Jordanovac 110, Zagreb 10000, Croatia.)

  • Davor Kunovac

    (Croatian National Bank, Trg hrvatskih velikana 3, Zagreb 10002, Croatia.)

  • Maroje Lang

    (Croatian National Bank, Trg hrvatskih velikana 3, Zagreb 10002, Croatia.)

Abstract

This paper explores the impact of the USD/EUR exchange rate on inflation in the Central and East European countries (CEEC). In particular, we analyse which portion of the variation in inflation in the CEEC can be attributed to the USD/EUR exchange rate, as an external shock. In addition, we study to what extent USD/EUR exchange rate shocks influence inflation in the CEEC. A vector autoregression model with block exogeneity restrictions is employed to trace the impact of the USD/EUR exchange rate fluctuations on inflation at each stage along the distribution chain. We find that the USD/EUR exchange rate has different levels of impact on inflation among the CEEC with different exchange rate regimes. Our empirical exercise shows that the USD/EUR exchange rate accounts for the largest share of inflation volatility in the CEEC with stable exchange rates of the domestic currency against the euro. Furthermore, the extent of the USD/EUR exchange rate's influence on inflation in the CEEC is the largest in the economies with stable exchange rate regimes. These results might be important in the context of the price stability requirement of the Maastricht Criteria: in addition to the internal challenge of keeping low inflation and dealing with the difficulties of the price convergence process, the applicant countries could face problems beyond their influence. Comparative Economic Studies (2008) 50, 646–662. doi:10.1057/ces.2008.37

Suggested Citation

  • Ljubinko Jankov & Ivo Krznar & Davor Kunovac & Maroje Lang, 2008. "The Impact of the USD/EUR Exchange Rate on Inflation in the Central and East European Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 50(4), pages 646-662, December.
    • Handle: RePEc:pal:compes:v:50:y:2008:i:4:p:646-662
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    Citations

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    Cited by:

    1. Maja Bukovšak & Gorana Lukinić Čardić & Nina Pavić, 2020. "Structure of capital flows and exchange rate: the case of Croatia," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 113-146, February.
    2. Goran Jovičić & Davor Kunovac, 2017. "What is Driving Inflation and GDP in a Small European Economy: The Case of Croatia," Working Papers 49, The Croatian National Bank, Croatia.
    3. Rafael Ravnik & Nikola Bokan, 2018. "Quarterly Projection Model for Croatia," Surveys 34, The Croatian National Bank, Croatia.

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