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Exchange Rate, Money, and Wages: What is Driving Prices in Armenia?

  • Armine Khachatryan
  • David A. Grigorian
  • Grigor Sargsyan

This paper is the first attempt to look at inflation dynamics and monetary transmission mechanisms in Armenia in the context of a full information model containing three interrelated markets: foreign exchange, money, and labor. Using the vector error correction model (VECM) approach, we find that the exchange rate pass-through to prices is very strong relative to credit, wage, and interest rate channels. The analysis suggests a relatively fast adjustment of prices to long-run disequilibria in the exchange rate market, albeit with initial overshooting of the price level. In addition, we find no evidence of prices responding to changes in money and wages in a statistically significant manner.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/229.

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Length: 30
Date of creation: 01 Dec 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/229
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  1. Bennett T. McCallum & Monica Hargraves, 1994. "A Monetary Impulse Measure for Medium-Term Policy Analysis," IMF Working Papers 94/146, International Monetary Fund.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
  3. Louis Kuijs, 2002. "Monetary Policy Transmission Mechanisms and Inflation in Slovakia," IMF Working Papers 02/80, International Monetary Fund.
  4. Ben Hunt & Peter Isard, 2003. "Some Implications for Monetary Policy of Uncertain Exchange Rate Pass-Through," IMF Working Papers 03/25, International Monetary Fund.
  5. Leo Bonato & Andreas Billmeier, 2002. "Exchange Rate Pass-Through and Monetary Policy in Croatia," IMF Working Papers 02/109, International Monetary Fund.
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