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Transmission of Exchange Rate Shocks into Domestic Inflation: The Case of the Czech Republic

Oxana Babetskaia-Kukharchuk
Authors registered in the RePEc Author Service: Oxana Babecká-Kucharčuková

Working Papers from Czech National Bank, Research Department

Abstract: This paper aims at estimating the exchange rate pass-through (ERPT) for the Czech Republic. The existing empirical literature does not come to a consensus about the degree of pass-through to Czech inflation. Since there is no unique approach regarding how to measure ERPT, we use various specifications found in the pass-through literature for the Czech Republic. In addition, we estimate the pass-through along the distribution chain in the spirit of McCarthy (2007). We try to explore the properties of exchange rate shock transmission into Czech consumer prices by comparing impulse responses among 11 specifications estimated on data transformed in monthly differences and in annual rates. Equilibrium pass-through is estimated with the help of the VEC model. In addition, we try to account for possible variation in time. The simplest approach is a re-estimation of VAR models on two sub-periods. Our second strategy is the estimation of the error correction equation with the Kalman filter. Finally, we explore how the pass-through differs between tradable (3 sub-groups) and non-tradable goods. We find that the speed of exchange rate shock transmission to all prices is quite high. However, in absolute terms, ERPT does not exceed 25 – 30%.

Keywords: Exchange rate pass-through; inflation; Kalman filter; VAR; VECM. (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon, nep-opm and nep-tra
Date: 2007-12
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Journal Article: Transmission of Exchange Rate Shocks into Domestic Inflation: The Case of the Czech Republic (2009) Downloads
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