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The Exchange Rate Pass-Through in a Cointegrated VAR Model

Ben Cheikh, Nidhaleddine and Louhichi, Waël (2013): The Exchange Rate Pass-Through in a Cointegrated VAR Model.

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This paper analyzes the exchange rate pass-through (ERPT) into consumer prices for 12 euro area (EA) countries within a cointegrated VAR (CVAR) framework. Using the Johansen cointegration procedure, results indicate the existence of one cointegrating vectors at least for each EA country of our sample. When measuring the long-run effect of exchange rate changes on consumer prices, we found a wide dispersion of ERPT elasticities, especially between “peripheral” and “core” EA economies. For instance, consumer prices rise by 84% in Portugal following one percent depreciation of exchange rate, while for the German economy the extent of pass-through is not exceeding 0.20%. Besides, the loading factors point out a very slow adjustment of consumer prices towards their long-run equilibrium across EA countries, explaining the weakness of ERPT estimates in the short-run.

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