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.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange Rate Pass-Through, Inflation, Cointegration
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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