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Prices and Exchange Rate of Hellenic Drachma (GRD), during 1981-

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  • Stamatopoulos Theodoros

    (TEI of Crete, University of Piraeus, Greece & CEFI/Mediterranean University of Aix-Marseille II, France.)

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    Abstract

    The paper presents empirical results on an import prices equation to the case of the small open Hellenic economy, during her course to the European Monetary Union, in the 1980s until mid-1990s. The analysis employs cointegration theory to examine the long-run co-movements of prices, effective exchange rate of GRD and unit labour cost of the European countries, which export to Greece. Innovation accounting is also used so as to detect the dynamics of the data set. We found slight evidence to support long run equilibrium, however, it was only the Hellenic inflation rate, which was adjusting to the deviations from this. The fragile stability of the system is confirmed by the impulse response functions examination where the exchange rate of the GRD do not converge to its long-run values, even after a 3 years period from the one unit-shock in various innovations. The determinant role of the growth rate of the unit labour cost and therefore of European countries’ prices to the exchange rate of GRD, to the Hellenic inflation rate, and less to the growth rate of the import prices is (1) justified by its high proportion to their variance decomposition and (2) became apparent approximately after 9 months. The latter seems to amount to the “contract-period” in the Magee’s terminology.

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    File URL: http://128.118.178.162/eps/if/papers/0505/0505013.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series International Finance with number 0505013.

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    Length: 14 pages
    Date of creation: 20 May 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpif:0505013

    Note: Type of Document - pdf; pages: 14. The paper is published from the 'European Research Studies Journal', in 2000, vol. III, Iss.(1-2), pp.105-121.
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    Web page: http://128.118.178.162

    Related research

    Keywords: Trade Balance Adjustment through exchange rate policies; European Monetary Integration; Unit Root Tests; Co-integration Analysis; Innovation Accounting;

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    References

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    1. Irving B. Kravis & Robert E. Lipsey, 1977. "Export and Domestic Prices Under Inflation and Exchange Rate Movements," NBER Working Papers 0176, National Bureau of Economic Research, Inc.
    2. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-73.
    3. Bennett T. McCallum, 1993. "Unit roots in macroeconomic time series: some critical issues," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 13-44.
    4. Brissimis, Sophocles N. & Leventakis, John A., 1989. "The effectiveness of devaluation: A general equilibrium assessment with reference to Greece," Journal of Policy Modeling, Elsevier, vol. 11(2), pages 247-271.
    5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    6. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    7. Richard Herd, 1987. "Import and Export Price Equations for Manufactures," OECD Economics Department Working Papers 43, OECD Publishing.
    8. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
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