Exchange Rates and Inflation Under EMU: An Update

Patrick Honohan and Philip Lane

No 4583, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In our recent Economic Policy article (Honohan and Lane, 2003), we argued that the strength of the US dollar 1999-2001 had an important impact on inflation divergence within the EMU and in particular the surge in Ireland?s inflation to over 7%. This hypothesis has been subjected to a grueling out-of-sample test: would the dollar?s subsequent weakness contribute to inflation convergence and in particular to a fall in Irish inflation? Fortunately for us, the theory has passed the test with flying colours. Irish inflation stopped dead in its tracks: consumer prices were unchanged between May and November of 2003. Regression analysis on quarterly inflation data across EMU members 1999.1-2004.1 confirms the importance of the exchange rate channel, although pinning down the exact dynamic specification will require a further span of data.

Keywords: inflation; Exchange rates; Emu (search for similar items in EconPapers)
JEL-codes: E31 E42 F41 (search for similar items in EconPapers)
Date: 2004-08
New Economics Papers: this item is included in nep-eec, nep-ifn, nep-mac and nep-mon
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Citations: View citations in EconPapers (31)

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Working Paper: Exchange Rates and Inflation under EMU: An Update (2005)
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