Exchange Rate Pass-Through and Irish Import Prices
AbstractThis study assesses the extent to which exchange rate changes affect Irish import prices (i.e. the extent of exchange rate pass-through, PT) by analysing data from the 1963 to 1995 period. The paper fills two important gaps in the literature: i) by making due allowance for the time series properties of the data and ii) by concentrating on the case of a small open economy. The majority of international empirical studies in the area do not provide support for full, or close to full, PT. Reasons put forward for this finding include the "menu" costs associated with altering prices, hedging techniques, intra-firm pricing by multinationals, the existence of non-tariff barriers, and the entry/exit of firms associated with exchange rate induced price changes. If the proposition of monetary neutrality is accepted, however, full PT would be expected to hold over the medium to long run. Many previous studies assess the degree of PT by relating import prices to the exchange rate, foreign costs and domestic competing prices. The usual approach involves estimating a single equation and using the estimated coefficients to assess the degree of PT. It is argued in this paper, however, that such single equation estimation will lead to estimates of the degree of PT which appear too low because the strong relationship between import and domestic-competing prices will not be properly taken into account using such a technique. This study makes use of the so-called Johansen technique to allow for this problem and uncovers two long-run relationships among the data, i.e. one between import unit values, the exchange rate and foreign costs and another between domestic competing prices and the same two variables. In so doing, it confirms the existence of very close to full PT in the case of both Irish import prices and domestic competing prices. Many of the previous results in the literature demonstrating substantially less than full PT may be due to the failure to make proper allowance for the time series properties of the data or for the strong relationship which exists between import and domestic competing prices. Finally, it is found that the speed of adjustment to the long-run relationships appears to be quite low, thus supporting the existence of incomplete PT in the short run.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Central Bank of Ireland in its series Research Technical Papers with number 6/RT/96.
Length: 24 pages
Date of creation: Dec 1996
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
- Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
- Menon, Jayant, 1996. "The Degree and Determinants of Exchange Rate Pass-through: Market Structure, Non-tariff Barriers and Multinational Corporations," Economic Journal, Royal Economic Society, vol. 106(435), pages 434-44, March.
- Søren Johansen & Katarina Juselius, 1992.
"Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model,"
92-04, University of Copenhagen. Department of Economics.
- Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
- Kenny, Geoff & McGettigan, Donal, 1996. "Non-Traded, Traded and Aggregate Inflation In Ireland (Part 2)," Research Technical Papers 3B/RT/96, Central Bank of Ireland.
- Menon, Jayant, 1994. "The Theory of Exchange Rates and Traded Goods Prices in the Short-Run," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 47(1), pages 55-68.
- Jayant Menon, 1993. "Exchange Rates, Import Prices, And The Macroeconomy," Economic Papers, The Economic Society of Australia, vol. 12(1), pages 37-48, 03.
- Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
- Sven W. Arndt & J. David Richardson, 1988. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
- Richard Baldwin, 1988.
"Hysteresis In Import Prices: The Beachhead Effect,"
NBER Working Papers
2545, National Bureau of Economic Research, Inc.
- Peter Hooper & Catherine L. Mann, 1989. "Exchange Rate Pass-through in the 1980s: The Case of U.S. Imports of Manufactures," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 297-337.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Bermingham, Colin, 2008. "Quantifying the Impact of Oil Prices on Inflation," Research Technical Papers 8/RT/08, Central Bank of Ireland.
- 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.
- Tokhir Mirzoev, 2004. "A Dynamic Model of Endogenous Exchange Rate Pass-Through," International Finance 0409002, EconWPA.
- repec:eso:journl:v:37:y:2006:i:1:p:27-46 is not listed on IDEAS
- M. Abimbola Oyinlola & M. Adetunji Babatunde, 2009. "A Bound Testing Analysis Of Exchange Rate Pass- Through To Aggregate Import Prices In Nigeria: 1980-2006," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 34(2), pages 97-109, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Smith).
If references are entirely missing, you can add them using this form.