Euro-dollar polarization and heterogeneity in exchange rate pass-throughs within the euro zone

Mariarosaria Comunale

MPRA Paper from University Library of Munich, Germany

Abstract: This paper provides an empirical study of the asymmetrical spillovers of the euro-US dollar exchange rate on inflation in the euro zone. We divide the euro zone members in two groups of countries: "core" (closely related to Germany) and "periphery", testing if the euro-US dollar exchange rate is still able to give a different impact on the groups ’ performance as in the past US dollar-deutschmark polarization phenomenon. Using a dynamic panel data framework based on an exchange rate pass-through model, we estimate the elasticities of the two groups by system IV-GMM and the common correlated effects mean group estimator, testing for the asymmetry. Estimating the model with the first type of method, the exchange rate pass-through coefficient is always significant but the asymmetry between the groups is rejected. Using the common correlated effects mean group estimator we find that the coefficient is significantly negative only for core countries and the hypothesis of asymmetry is confirmed. Note that the significance disappears if we control for the first three years of EMU, but the coefficients for core and periphery have opposite sign in any case. Instead, other unobservable factors, representing global events or spillovers effects, play a relevant role in all the specifications. By using the nominal effective exchange rate instead, we found a significant coefficient in case of the whole EMU, while the elasticities for core and periphery are not statistically different from zero. Based on these results, we can conclude that the euro-US dollar is an important factor, but not the only key factor, in determining the asymmetry in inflation between core and periphery. The nominal effective exchange rate instead is a very important driver for the inflation only considering the whole euro zone. Therefore, the EMU seems to not have insulate enough some member countries from shocks coming from outside, as in the case of nominal exchange rate shocks.

Keywords: Exchange Rate Pass-Through; Dynamic Panel Data; Inflation; Exchange Rates; European Monetary Union; Cross-sectional dependence (search for similar items in EconPapers)
JEL-codes: C33 E31 F31 F36 F41 (search for similar items in EconPapers)
Date: 2014-07, Revised 2014-08
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
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Related works:
Working Paper: Euro-Dollar Polarization and Heterogeneity in Exchange Rate Pass-Throughs Within the Euro Zone (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:57704

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