Exchange Rate Movements and Inflation Performance: The Case of Italy

Robert Ford and Thomas Krueger

No 1995/041, IMF Working Papers from International Monetary Fund

Abstract: This paper presents an empirical model to study the response of wages and prices to movements in the nominal exchange rate. A four-equation model is applied to Italian data to evaluate the response of tradeable goods prices, consumer prices, and wages following the lira’s exit from the ERM in the fall of 1992. The model tracks reasonably well the inflation performance of tradeables, especially import prices. But it is argued that structural changes in the labor market contribute to an overprediction of price and wage inflation.

Keywords: WP; import price; labor market; output gap; productivity; oil price change; labor cost indicator; goods price; wage-price spiral; oil price effect; competitor price; import price increase; price shock; price variable; b. price; traded goods price; partner country import price; Import prices; Inflation; Wages; Consumer prices; Export prices; Europe (search for similar items in EconPapers)
Pages: 28
Date: 1995-04-01
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