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US inflation and the dollar exchange rate: a vector error correction model

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  • Ki-Ho Kim
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    Abstract

    Many studies investigating the relation between inflation and exchange rates have found that exchange rates influenced inflation, while other studies have failed to do so or reported mixed results. These findings, however, might be spurious as the majority of the earlier investigations suffered from misspecifications of one kind or another. The current paper addresses the problem by employing an up-to-date and powerful cointegration method developed by Johansen (1988). In a system of five-equation vector error correction model, this paper finds that the US inflation, exchange rate, money supply, income, and interest rate are cointegrated. The cointegration analysis of the data covering the 1973-95 period reveals that the dollar exchange rate has a significant negative impact on the inflation measured by the producer price index. It is further established that the exchange rate Granger causes the inflation.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 30 (1998)
    Issue (Month): 5 ()
    Pages: 613-619

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    Handle: RePEc:taf:applec:v:30:y:1998:i:5:p:613-619

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    Cited by:
    1. Beirne, John & Bijsterbosch, Martin, 2009. "Exchange Rate Pass-through in Central and Eastern European Member States," Working Paper Series 1120, European Central Bank.
    2. Fabrizio Coricelli & Boštjan Jazbec & Igor Masten, 2004. "Exchange Rate Policy and Inflation in Acceding Countries: The Role of Pass-through," William Davidson Institute Working Papers Series 2004-674, William Davidson Institute at the University of Michigan.
    3. Zulfiqar Hyder & Sardar Shah, 2005. "Exchange Rate Pass-Through to Domestic Prices in Pakistan," Macroeconomics 0510021, EconWPA.
    4. Leo Bonato & Andreas Billmeier, 2002. "Exchange Rate Pass-Through and Monetary Policy in Croatia," IMF Working Papers 02/109, International Monetary Fund.
    5. Peter Rowland, . "Exchange Rate Pass-Throught to Domestic Prices: The Case of Colombia," Borradores de Economia 254, Banco de la Republica de Colombia.
    6. Prasad S. Bhattacharya & Dimitrios D. Thomakos, 2006. "Forecasting Industry-Level CPI and PPI Inflation: Does Exchange Rate Pass-Through Matter?," Economics Series 2006_10, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    7. Carlos José García & Jorge Enrique Restrepo, 2001. "Price Inflation and Exchange Rate Pass-Through in Chile," Working Papers Central Bank of Chile 128, Central Bank of Chile.
    8. Peter Rowland, 2003. "Exchange Rate Pass-Through To Domestic Prices: The Case Of Colombia," BORRADORES DE ECONOMIA 002683, BANCO DE LA REPÚBLICA.
    9. Schröder, Michael & Hüfner, Felix P., 2002. "Exchange rate pass-through to consumer prices: a European perspective," ZEW Discussion Papers 02-20, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    10. Martins Bitans, 2004. "Pass-Through of Exchange Rates to Domestic Prices in East European Countries and the Role of Economic Enviroment," Working Papers 2004/04, Latvijas Banka.
    11. Beirne, John & Bijsterbosch, Martin, 2011. "Exchange rate pass-through in central and eastern European EU Member States," Journal of Policy Modeling, Elsevier, vol. 33(2), pages 241-254, March.
    12. Peter Rowland, 2004. "Exchange Rate Pass-Through To Domestic Prices: The Case Of Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
    13. Aliyu, Shehu Usman Rano & Yakub, Ma'aji Umar & Sanni, Ganiyu Kayode & Duke, Omolara, 2009. "Exchange Rate Pass-through in Nigeria: Evidence from a Vector Error Correction Model," MPRA Paper 25053, University Library of Munich, Germany, revised 29 Mar 2010.
    14. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.

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