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Is a Low-inflation Environment Associated with Reduced Exchange Rate Pass Through?

  • Mark J. Holmes

    ()

    (Department of Economics, Waikato University Management School, New Zealand)

This paper investigates the extent of pass through from the US dollar exchange rate to consumer prices in the European Union. A relatively new line of empirical research is pursued that considers whether or not the extent of exchange rate pass through is related to the inflationary environment. In contrast to previous empirical studies, recently developed panel data cointegrating techniques to measure long run pass through are employed. While there is evidence that long-run pass through has declined since the 1970s, it actually increased during the early ERM years despite the presence of lower inflation.

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File URL: http://www.taloustieteellinenyhdistys.fi/images/stories/fep/fep22006_holmes.pdf
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Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

Volume (Year): 19 (2006)
Issue (Month): 2 (Autumn)
Pages: 58-68

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Handle: RePEc:fep:journl:v:19:y:2006:i:2:p:58-68
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  1. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
  2. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
  3. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
  4. Abdulnasser Hatemi-J & Manuchehr Irandoust, 2004. "Is Pricing to Market Behavior a Long-Run Phenomenon? A Non-Stationary Panel Analysis," Empirica, Springer, vol. 31(1), pages 55-67, March.
  5. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  6. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 205-28, May.
  7. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
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