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Exchange Rate Pass-Through To Domestic Prices In The Central European Countries

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  • Rajmund MIRDALA

Abstract

Exchange rate plays an important role in transmitting pressures from the external shocks to the domestic economy. Development of inflation in the domestic economy is significantly determined by the ability of exchange rate to transmit external price related pressures to the domestic market. Considering the new EU member countries obligation to adopt euro the loss of the monetary sovereignty should be analyzed not only in the view of the direct positive and negative effects of this decision but also in the view of many indirect effects. While the exchange rates of majority of the EMU candidate countries are strongly affected by the euro exchange rate on the international markets there is still room for them to float partially reflecting changes in the national economic development. Ability of the exchange rate to transfer external shocks to the national economy remains one of the most discussed areas relating to the current stage of the monetary integration process in the European single market. In the paper we analyze the ability of the exchange rate to weaken or eventually to strengthen the transmission of the external inflation pressures to the national economy in the Czech Republic, Hungary, Poland and the Slovak republic. In order to meet this objective we estimate a vector autoregression (VAR) model correctly identified by the Cholesky decomposition of innovations that allows us to identify structural shocks hitting the model. Variance decomposition and impulse-response functions are computed in order to estimate the exchange rate pass-through from the foreign prices of import to the domestic consumer price indexes in the Visegrad countries. Ordering of the endogenous variables in the model is also considered allowing us to check the robustness of the empirical results.

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Bibliographic Info

Article provided by Spiru Haret University, Faculty of Financial Management and Accounting Craiova in its journal Journal of Applied Economic Sciences.

Volume (Year): 4 (2009)
Issue (Month): 3(9)_Fall2009 ()
Pages:

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Handle: RePEc:ush:jaessh:v:4:y:2009:i:3(9)_fall2009:75

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Web page: http://www2.spiruharet.ro/facultati/facultate.php?id=14
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Keywords: exchange rate; inflation; VAR; Cholesky decomposition; variance decomposition; impulse-response function;

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References

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  1. Campa, José Manuel & Goldberg, Linda S & González Mìnguez, Jose Manuel, 2005. "Exchange Rate Pass-Through to Import Prices in the Euro Area," CEPR Discussion Papers 5347, C.E.P.R. Discussion Papers.
  2. Toshitaka Sekine, 2006. "Time-varying exchange rate pass-through: experiences of some industrial countries," BIS Working Papers 202, Bank for International Settlements.
  3. Michele Ca’ Zorzi & Elke Hahn & Marcelo Sánchez, 2007. "Exchange rate pass-through in emerging markets," Working Paper Series 739, European Central Bank.
  4. Stavarek, Daniel, 2008. "Exchange Market Pressure in Central European Countries from the Eurozone Membership Perspective," MPRA Paper 12079, University Library of Munich, Germany.
  5. Nabil Ben Arfa, 2009. "Analysis of Shocks Affecting Europe: EMU and some Central and Eastern Acceding Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(1), pages 21-38, March.
  6. Kosta Josifidis & Jean-Pierre Allegret & Emilija Beker Pucar, 2009. "Monetary and Exchange Rate Regimes Changes: The Cases of Poland, Czech Republic, Slovakia and Republic of Serbia," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 199-226, June.
  7. Kitov, Ivan & Kitov, Oleg & Dolinskaya, Svetlana, 2008. "Comprehensive macro-model for the U.S. economy," MPRA Paper 9808, University Library of Munich, Germany.
  8. Roberto CELLINI & Alessandro PAOLINO, 2009. "Us Price Indices And The Exchange Rate: Are Recreational Products Different?," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 4(1(7)_ Spr).
  9. Jaromír Šindel & Stanislav Šaroch, 2008. "The political economy of exchange rate policy in central and east european countries - sector approach," Politická ekonomie, University of Economics, Prague, vol. 2008(1), pages 17-39.
  10. Carlos Cortinhas, 2009. "Exchange Rate Pass-Through In Asean: Implications For The Prospects Of Monetary Integration In The Region," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 54(04), pages 657-687.
  11. Mirdala, Rajmund, 2009. "Shocking aspects of monetary integration (SVAR approach)," MPRA Paper 17057, University Library of Munich, Germany.
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Cited by:
  1. Rajmund Mirdala, 2010. "Sources of Exchange Rate Dynamics in the European Transition Economies," Journal of Advanced Studies in Finance, Association for Sustainable Education, Research and Science, vol. 0(1), pages 60-71, June.

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