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Long Run Exchange Rate Pass-Through: A Panel Cointegration Approach

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  • Nidhaleddine Ben Cheikh

Abstract

This paper examines the extent and evolution of exchange rate pass-through (ERPT) using panel cointegration approach. For 27 OECD countries, we provide a strong evidence of incomplete ERPT in sample of 27 OECD countries. Both FM-OLS and DOLS estimators show that pass-through elasticity does not exceed 0.70%. When considering individual estimates, we note a cross-country differences in the long run ERPT. We find that inflation regime and exchange rate volatility are potential macroeconomic sources of this long-run heterogeneity. When focusing on the subsample of 12 European Monetary Union (EMU) countries, our results show a steady decline in the degree of ERPT throughout the different exchange rate arrangements: pass-through elasticity was close to unity during the "snake-in-the tunnel" period while it is about 0.50% since the formation of the euro area. The observed decline in ERPT to import prices was synchronous to the shift towards reduced inflation regime.

Suggested Citation

  • Nidhaleddine Ben Cheikh, 2012. "Long Run Exchange Rate Pass-Through: A Panel Cointegration Approach," FIW Working Paper series 078, FIW.
  • Handle: RePEc:wsr:wpaper:y:2012:i:078
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    References listed on IDEAS

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    1. Jeannine Bailliu & Eiji Fujii, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Staff Working Papers 04-21, Bank of Canada.
    2. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
    3. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
    4. repec:ebl:ecbull:v:3:y:2005:i:26:p:1-14 is not listed on IDEAS
    5. BARHOUMI Karim, 2005. "Exchange Rate Pass-Through Into Import Prices In Developing Countries: An Empirical Investigation," Economics Bulletin, AccessEcon, vol. 3(26), pages 1-14.
    6. 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 (IfW), vol. 2, pages 1-36.
    7. Banerjee, Anindya & Carrion-i-Silvestre, Josep Lluís, 2006. "Cointegration in panel data with breaks and cross-section dependence," Working Paper Series 591, European Central Bank.
    8. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
    9. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
    10. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    11. 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.
    12. Mark J. Holmes, 2006. "Is a Low-inflation Environment Associated with Reduced Exchange Rate Pass Through?," Finnish Economic Papers, Finnish Economic Association, vol. 19(2), pages 58-68, Autumn.
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    Cited by:

    1. Joscha Beckmann & Ansgar Belke & Florian Verheyen, 2014. "Exchange rate pass-through into German import prices - a disaggregated perspective," Applied Economics, Taylor & Francis Journals, vol. 46(34), pages 4164-4177, December.

    More about this item

    Keywords

    Exchange Rate Pass-Through; Import Prices; Nonstationary Panel data;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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