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Exchange rate pass-through to domestic prices in the Central European countries

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  • Mirdala, Rajmund

Abstract

Exchange rate plays an important role in transmitting pressures from the external shocks to the domestic economy. Development of inflation in the domestic economy is significantly determined by the ability of exchange rate to transmit external price related pressures to the domestic market. Considering the new EU member countries obligation to adopt euro the loss of the monetary sovereignty should be analyzed not only in the view of the direct positive and negative effects of this decision but also in the view of many indirect effects. While the exchange rates of majority of the EMU candidate countries are strongly affected by the euro exchange rate on the international markets there is still room for them to float partially reflecting changes in the national economic development. Ability of the exchange rate to transfer external shocks to the national economy remains one of the most discussed areas relating to the current stage of the monetary integration process in the European single market. In the paper we analyze the ability of the exchange rate to weaken or eventually to strengthen the transmission of the external inflation pressures to the national economy in the Czech republic, Hungary, Poland and the Slovak republic. In order to meet this objective we estimate a vector autoregression (VAR) model correctly identified by the Cholesky decomposition of innovations that allows us to identify structural shocks hitting the model. Variance decomposition and impulse-response functions are computed in order to estimate the exchange rate pass-through from the foreign prices of import to the domestic consumer price indexes in the Visegrad countries. Ordering of the endogenous variables in the model is also considered allowing us to check the robustness of the empirical results.

Suggested Citation

  • Mirdala, Rajmund, 2009. "Exchange rate pass-through to domestic prices in the Central European countries," MPRA Paper 19282, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:19282
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    References listed on IDEAS

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    1. Campa, Jose M. & Goldberg, Linda S. & Gonzalez-Minguez, Jose M., 2005. "Exchange-rate pass-through to import prices in the euro area," IESE Research Papers D/609, IESE Business School.
    2. Michele Ca’ Zorzi & Elke Hahn & Marcelo Sánchez, 2007. "Exchange Rate Pass-Through in Emerging Markets," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(4), pages 84-102, November.
    3. Toshitaka Sekine, 2006. "Time-varying exchange rate pass-through: experiences of some industrial countries," BIS Working Papers 202, Bank for International Settlements.
    4. Ca' Zorzi, Michele & Hahn, Elke & Sánchez, Marcelo, 2007. "Exchange rate pass-through in emerging markets," Working Paper Series 739, European Central Bank.
    5. Kosta Josifidis & Jean-Pierre Allegret & Emilija Beker Pucar, 2009. "Monetary and Exchange Rate Regimes Changes: The Cases of Poland, Czech Republic, Slovakia and Republic of Serbia," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 199-226, June.
    6. Nabil Ben Arfa, 2009. "Analysis of Shocks Affecting Europe: EMU and some Central and Eastern Acceding Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(1), pages 21-38, March.
    7. Kitov, Ivan & Kitov, Oleg & Dolinskaya, Svetlana, 2008. "Comprehensive macro-model for the U.S. economy," MPRA Paper 9808, University Library of Munich, Germany.
    8. Takatoshi Ito & Kiyotaka Sato, 2006. "Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through," CIRJE F-Series CIRJE-F-406, CIRJE, Faculty of Economics, University of Tokyo.
    9. Roberto CELLINI & Alessandro PAOLINO, 2009. "Us Price Indices And The Exchange Rate: Are Recreational Products Different?," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 4(1(7)_ Spr).
    10. Jaromír Šindel & Stanislav Šaroch, 2008. "Politická ekonomie kursové politiky ve střední a východní evropě - odvětvový přístup
      [The political economy of exchange rate policy in central and east european countries - sector approach]
      ," Politická ekonomie, University of Economics, Prague, vol. 2008(1), pages 17-39.
    11. Mirdala, Rajmund, 2009. "Shocking aspects of monetary integration (SVAR approach)," MPRA Paper 17057, University Library of Munich, Germany.
    12. Stavarek Daniel, 2008. "Exchange Market Pressure in Central European Countries from the Eurozone Membership Perspective," South East European Journal of Economics and Business, Sciendo, vol. 3(2), pages 7-18, November.
    13. repec:wsi:serxxx:v:54:y:2009:i:04:n:s0217590809003458 is not listed on IDEAS
    14. Carlos Cortinhas, 2009. "Exchange Rate Pass-Through In Asean: Implications For The Prospects Of Monetary Integration In The Region," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 54(04), pages 657-687.
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    Cited by:

    1. Mirdala, Rajmund, 2010. "Sources of exchange rate dynamics in the European transition economies," MPRA Paper 25771, University Library of Munich, Germany.

    More about this item

    Keywords

    exchange rate; inflation; VAR; Cholesky decomposition; variance decomposition; impulse-response function;

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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