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Measuring Long-Run Exchange Rate Pass-Through

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  • Kozluk, Tomasz
  • Banerjee, Anindya
  • de Bandt, Olivier

Abstract

The paper discusses the issue of estimating short- and long-run exchange rate pass-through to import prices in euro area countries and reviews some problems with the measures recently proposed in the literature. Theoretical considerations suggest a cointegrating relationship (between import unit values, the exchange rate and foreign prices), which is typically ignored in existing empirical studies. We use time series and up-to-date panel data techniques to test for cointegration with the possibility of structural breaks and show how the long run may be restored in the estimation. The main finding is that allowing for possible breaks around the formation of EMU and the appreciation of the euro starting in 2001 helps restore a long run cointegration relationship, where over the sample period the fixed component of the pass-through decreased while the variable component tended to increase. --

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2008-6
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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 2 (2008)
Issue (Month): 6 ()
Pages: 1-36

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Handle: RePEc:zbw:ifweej:7123

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Keywords: Exchange rates; pass-through; import prices; panel cointegration; structural breaks;

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References

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  1. Frankel, Jeffrey & Parsley, David & Wei, Shang-Jin, 2005. "Slow Passthrough Around the World: A New Import for Developing Countries?," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp05-016, Harvard University, John F. Kennedy School of Government.
  2. Anindya Banerjee & Josep Lluís Carrion-i-Silvestre, 2006. "Cointegration in Panel Data with Breaks and Cross-Section Dependence," Economics Working Papers, European University Institute ECO2006/5, European University Institute.
  3. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2004. "Some cautions on the use of panel methods for integrated series of macroeconomic data," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 7(2), pages 322-340, December.
  4. Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers, Queen's University, Department of Economics 862, Queen's University, Department of Economics.
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  6. Maurice Obstfeld, 2002. "Inflation-Targeting, Exchange-Rate Pass-Through, and Volatility," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 102-107, May.
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  8. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports, Federal Reserve Bank of New York 124, Federal Reserve Bank of New York.
  9. Michael Devereux & Charles Engel & Cedric Tille, 1999. "Exchange-Rate Pass-Through and the Welfare Effects of the Euro," Working Papers, University of Washington, Department of Economics 0034, University of Washington, Department of Economics.
  10. 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, C.E.P.R. Discussion Papers 5347, C.E.P.R. Discussion Papers.
  11. Gita Gopinath & Roberto Rigobon, 2008. "Sticky Borders," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(2), pages 531-575, 05.
  12. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, Elsevier, vol. 44(7), pages 1389-1408, June.
  13. Jushan Bai & Serena Ng, 2001. "A PANIC Attack on Unit Roots and Cointegration," Boston College Working Papers in Economics, Boston College Department of Economics 519, Boston College Department of Economics.
  14. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2008. "High exchange-rate volatility and low pass-through," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(6), pages 1113-1128, September.
  15. Adolfson, Malin, 2001. "Monetary Policy with Incomplete Exchange Rate Pass-Through," Working Paper Series in Economics and Finance 476, Stockholm School of Economics.
  16. Michael B. Devereux & Charles Engel, 2002. "Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange Rate Disconnect," NBER Working Papers 8858, National Bureau of Economic Research, Inc.
  17. Campa, José Manuel & González Mìnguez, Jose Manuel, 2004. "Differences in Exchange Rate Pass-Through in the Euro Area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4389, C.E.P.R. Discussion Papers.
  18. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph Gagnon & Jaime Marquez & Robert F. Martin & Trevor Reeve & John Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 833, Board of Governors of the Federal Reserve System (U.S.).
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