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Measuring Long-Run Exchange Rate Pass-Through

Author

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  • .De Bandt, O.
  • Banerjee, A.
  • Kozluk, T.

Abstract

The paper discusses the issue of estimating short- and long-run exchange rate pass-through to import prices in euro area countries and reviews some problems with the measures recently proposed in the literature. Theoretical considerations suggest a long-run Engle and Granger cointegrating relationship (between import unit values, the exchange rate and foreign prices), which is typically ignored in existing empirical studies. We use time series and up-to-date panel data techniques to test for cointegration with the possibility of structural breaks and show how the long-run may be restored in the estimation. The main finding is that allowing for possible breaks around the formation of EMU and the appreciation of the euro starting in 2001 helps restore a long run cointegration relationship, where over the sample period the fixed component of the pass-through decreased while the variable component tended to increase.

Suggested Citation

  • .De Bandt, O. & Banerjee, A. & Kozluk, T., 2007. "Measuring Long-Run Exchange Rate Pass-Through," Working papers 173, Banque de France.
    • Handle: RePEc:bfr:banfra:173
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    More about this item

    Keywords

    Exchange rates ; Pass-through ; Import prices ; Panel cointegration ; Structural break.;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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