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Exchange Rate Pass-Through in the Euro Area

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  • Hamid Faruqee

Abstract

Exchange rate pass-through in a set of euro area prices along the pricing chain is examined. Using a vector autoregression (VAR) approach, the empirics analyze the joint time-series behavior of the euro exchange rate and a system of euro-area prices in response to an exchange rate shock. The impulse-response functions from the VAR estimates are used to identify-in a ''new open economy macroeconomics model''-those key behavioral parameters that best replicate the pattern of exchange rate pass-through in the euro area. Area-wide prices are found to display incomplete pass-through, consistent with euro currency-pricing and pricing-to-market behavior. The results are compared to those for the other major industrial economies, and suggest that, as with the United States, "expenditure-switching" effects on the current account still operate but are generally small.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/14.

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Length: 27
Date of creation: 01 Jan 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/14

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Related research

Keywords: Exchange rates; Prices; exchange rate; exchange rate pass; import prices; exchange rate shock; export prices; open economy; area trade; asset market; import price; euro exchange rate; exchange rate fluctuations; domestic firms; exchange rate dynamics; trade flows; real exchange rate; exchange rate depreciation; open economies; intermediate goods; exchange rate shocks; price discrimination; export market; foreign exchange; terms of trade; elasticity of substitution; exchange rate regimes; external shocks; exchange rate changes; nominal exchange rates; trading costs; exchange rate determination; partner countries; exchange rate policy; exchange rate adjustment; effective exchange rate; prevailing exchange rate; multilateral context; imperfect competition; international trade; trade data; exchange rate theory; exchange rate volatility; exchange rate instability; political economy; nominal effective exchange rate; currency depreciation; trade deficit; exchange rate flexibility; foreign exchange market; producer price index; current account deficit; export market share; flexible exchange rates; current accounts; exchange rate variation; trade classification; trade impact; real exchange rate dynamics;

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References

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