The Exchange Rate Pass-Through in a Cointegrated VAR Model
AbstractThis paper analyzes the exchange rate pass-through (ERPT) into consumer prices for 12 euro area (EA) countries within a cointegrated VAR (CVAR) framework. Using the Johansen cointegration procedure, results indicate the existence of one cointegrating vectors at least for each EA country of our sample. When measuring the long-run effect of exchange rate changes on consumer prices, we found a wide dispersion of ERPT elasticities, especially between "peripheral" and "core" EA economies. For instance, consumer prices rise by 84% in Portugal following one percent depreciation of exchange rate, while for the German economy the extent of pass-through is not exceeding 0.20%. Besides, the loading factors point out a very slow adjustment of consumer prices towards their long-run equilibrium across EA countries, explaining the weakness of ERPT estimates in the short-run.
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Date of creation: 25 Oct 2013
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Exchange Rate Pass-Through; Inflation; Cointegration;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-09 (All new papers)
- NEP-EEC-2013-11-09 (European Economics)
- NEP-IFN-2013-11-09 (International Finance)
- NEP-OPM-2013-11-09 (Open Economy Macroeconomic)
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