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Pass-Through of Exchange Rates to Domestic Prices in East European Countries and the Role of Economic Enviroment

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  • Martins Bitans

    (Bank of Latvia)

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    Abstract

    The paper examines the exchange rate pass-through in a set of 13 East European countries during the period of 1993–2003. The pass-through estimates are derived from a recursive VAR model in first differences, and the impact of exchange rate changes on both producer and consumer prices is studied. The estimates obtained for two sub-sample periods generally show an incomplete pass-through over a two-year horizon. In addition, the results imply a considerable cross-country variation and suggest that a significant decline (by nearly 50%) in the pass-through is possible over time. In particular, it is found that the exchange rate pass-through in East European countries is positively and statistically significantly related to the average inflation rate and degree of exchange rate persistence. Moreover, the results confirm the existence of a strong relationship between the pass-through and changes in the import structure. Finally, there is some limited evidence that the magnitude of exchange rate pass-through might be positively related to the degree of country's openness to foreign trade.

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    Paper provided by Latvijas Banka in its series Working Papers with number 2004/04.

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    Date of creation: 30 Dec 2004
    Handle: RePEc:ltv:wpaper:200404
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    Keywords: pass-through of exchange rate; recursive VAR model; Exchange Rate Mechanism II;

    Find related papers by JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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    Cited by:

    1. Balázs Égert & Ronald MacDonald, 2006. "Monetary Transmission Mechanism in Transition Economies: Surveying the Surveyable," MNB Working Papers 2006/5, Magyar Nemzeti Bank (Central Bank of Hungary).
    2. Beirne, John & Bijsterbosch, Martin, 2011. "Exchange rate pass-through in central and eastern European EU Member States," Journal of Policy Modeling, Elsevier, vol. 33(2), pages 241-254, March.
    3. Dubravko Mihaljek & Marc Klau, 2008. "Exchange rate pass-through in emerging market economies: what has changed and why?," BIS Papers chapters,in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 103-130 Bank for International Settlements.
    4. Comunale, Mariarosaria & Simola, Heli, 2016. "The pass-through to consumer prices in CIS economies: The role of exchange rates, commodities and other common factors," BOFIT Discussion Papers 16/2016, Bank of Finland, Institute for Economies in Transition.
    5. Arratibel, Olga & Michaelis, Henrike, 2014. "The impact of monetary policy and exchange rate shocks in Poland: evidence from a time-varying VAR," Working Paper Series 1636, European Central Bank.
    6. Y. Ponomarev & P. Trunin & A. Ulyukayev., 2014. "Exchange Rate Pass-through in Russia," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 3.
    7. Oxana Babecká-Kucharèuková, 2009. "Transmission of Exchange Rate Shocks into Domestic Inflation: The Case of the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(2), pages 137-152, June.
    8. Arratibel, Olga & Michaelis, Henrike, 2013. "The Impact of Monetary Policy and Exchange Rate Shocks in Poland: Evidence from a Time-Varying VAR," Discussion Papers in Economics 21088, University of Munich, Department of Economics.
    9. Bijsterbosch, Martin & Beirne, John, 2009. "Exchange Rate Pass-through in Central and Eastern European Member States," Working Paper Series 1120, European Central Bank.

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