IDEAS home Printed from https://ideas.repec.org/a/ecb/ecbart/202000031.html
   My bibliography  Save this article

The transmission of exchange rate changes to euro area inflation

Author

Listed:
  • Ortega, Eva
  • Osbat, Chiara
  • Rubene, Ieva

Abstract

Aggregate exchange rate pass-through (ERPT) to import and consumer prices is lower in the EU than it was in the 1990s and is found to be non-linear. Low estimated aggregate ERPT to consumer prices does not mean that the exchange rate movements do not matter for inflation, as aggregate estimates mask substantial heterogeneities across countries, industries and time periods due to structural, cyclical and policy factors. Key structural characteristics that explain ERPT across industries or sectors are: import content of consumption; share of imports invoiced in own currency or in a third dominant currency; integration of a country and its trading partners in global value chains; and market power. In line with the literature, different types of shocks that move the exchange rate in the euro area elicit different price responses, so the combination of shocks that lie behind changes in the exchange rate at any point in time matters for the ERPT. Finally, monetary policy itself affects the ERPT and credible and active monetary policy lowers the observed ex post ERPT. Moreover, under the effective lower bound, credible non-standard monetary policy actions have a larger ERPT to consumer prices. Instead of rules of thumb, in order to assess the impact of exchange rate changes when forecasting inflation, it is better to use structural models with sufficient feedback loops that take into account the role of expectations and monetary policy reaction. JEL Classification: E31, F31, F41

Suggested Citation

  • Ortega, Eva & Osbat, Chiara & Rubene, Ieva, 2020. "The transmission of exchange rate changes to euro area inflation," Economic Bulletin Articles, European Central Bank, vol. 3.
  • Handle: RePEc:ecb:ecbart:2020:0003:1
    Note: 261931
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//press/economic-bulletin/articles/2020/html/ecb.ebart202003_01~7fc0abdec2.en.html
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Camatte, Hadrien & Daudin, Guillaume & Faubert, Violaine & Rifflart, Christine, 2023. "Estimating the elasticity of consumer prices to the exchange rate: An accounting approach," Journal of International Money and Finance, Elsevier, vol. 137(C).
    2. An, Lian & Wynne, Mark A. & Zhang, Ren, 2021. "Shock-dependent exchange rate pass-through: Evidence based on a narrative sign approach for Japan," Journal of International Money and Finance, Elsevier, vol. 118(C).
    3. Georgiadis, Georgios & Gräb, Johannes & Khalil, Makram, 2019. "Global value chain participation and exchange rate pass-through," Working Paper Series 2327, European Central Bank.

    More about this item

    Keywords

    consumer prices; euro area; exchange rates; import prices; inflation; monetary policy; pass-through;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbart:2020:0003:1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.