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A Panel Cointegration Analysis of the Exchange Rate Pass-Through

  • Ben Cheikh, Nidhaleddine
  • Mohamed Cheik, Hamidou

This paper investigates the presence of a long-run equilibrium relationship in the exchange rate pass-through (ERPT) equation for a panel of 27 OECD countries. Previous empirical panel data studies, have neglected the possibility of cross-sectional correlation and spillovers amongst countries. Since the strong economic and financial linkages between OECD countries cannot be ignored, we apply second generation panel unit root and panel cointegration tests which account for possible cross-section dependence across the units in the panel. Our results suggest the existence of a cointegrated equilibrium relationship between the variables in levels, as implied by the theoretical underpinning of the ERPT mechanism. When estimating the long-run pass-through coefficient, both FM-OLS and DOLS estimators show an incomplete pass-through, i.e. import prices sensitivity to exchange rate movements does not exceed 0.70% for our sample of OECD countries. This evidence of partial pass-through would represent a key element in understanding the ongoing global external imbalances.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49991.

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Date of creation: Sep 2013
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Handle: RePEc:pra:mprapa:49991
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  1. Mark J. Holmes, 2008. "Long-Run Pass-Through From The Exchange Rate To Import Prices In African Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 33(1), pages 97-111, June.
  2. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2005. "DSGE models of high exchange-rate volatility and low pass-through," International Finance Discussion Papers 845, Board of Governors of the Federal Reserve System (U.S.).
  3. Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
  4. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
  5. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  6. barhoumi karim, 2004. "Exchange Rate Pass-Through Into Import Prices In Developing Countries: An Empirical Investigation," Economics Bulletin, AccessEcon, vol. 28(10), pages A0.
  7. Campa, José Manuel & Goldberg, Linda S., 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers 4391, C.E.P.R. Discussion Papers.
  8. Kozluk, Tomasz & Banerjee, Anindya & de Bandt, Olivier, 2008. "Measuring Long-Run Exchange Rate Pass-Through," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2, pages 1-36.
  9. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 631-53, October.
  10. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  11. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  12. Barhoumi, Karim, 2006. "Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation," Economic Modelling, Elsevier, vol. 23(6), pages 926-951, December.
  13. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, . "Some Cautions on the Use of Panel Methods for Integrated Series of Macro-Economic Data," Working Papers 170, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  14. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I.
  15. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
  16. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
  17. Frank Smets & Raf Wouters, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Research 19, National Bank of Belgium.
  18. Eiji Fuji & Jeannine Bailliu, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Computing in Economics and Finance 2004 135, Society for Computational Economics.
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