Exchange rate pass-through to various price indices: empirical estimation using vector error correction models

Andreas Bachmann

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: The extent to which exchange rate fluctuations are passed through to domestic prices is of high relevance for open economies and for monetary authorities targeting price stability. Existing empirical studies estimating the exchange rate pass-through for Switzerland are based on either single equation estimation or on VAR models. However, these approaches feature some major drawbacks. The former cannot account for dynamic interactions between the time series and both methods disregard long-run equilibrium relations between the variable levels. This paper contributes to the evidence on the exchange rate pass-through in Switzerland by using a vector error correction model, which has the advantage of incorporating both short-run dynamics and long-run equilibrium relations among variables. The results reveal a significant impact of exchange rate shocks on various price (sub-)indices. Pass-through to import prices is substantial both in the short-run and in the long-run and occurs relatively quickly. It is slower, but still considerable in the long-run for the consumer price index and some of its sub-indices. Producer prices react significantly to exchange rate shocks as well. In contrast, consumer price inflation for services and for goods of domestic origin show hardly any significant response. The findings of this paper indicate a decline in the pass-through over time.

Keywords: Exchange rate pass-through; consumer prices; import prices; cointegration; vector error correction models; new open economy macroeconomic model (search for similar items in EconPapers)
JEL-codes: E31 F31 F41 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (3)

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