Exchange Rate, Money, and Wages: What is Driving Prices in Armenia?

Armine Khachatryan, David Grigorian and Grigor Sargsyan

No 2004/229, IMF Working Papers from International Monetary Fund

Abstract: This paper is the first attempt to look at inflation dynamics and monetary transmission mechanisms in Armenia in the context of a full information model containing three interrelated markets: foreign exchange, money, and labor. Using the vector error correction model (VECM) approach, we find that the exchange rate pass-through to prices is very strong relative to credit, wage, and interest rate channels. The analysis suggests a relatively fast adjustment of prices to long-run disequilibria in the exchange rate market, albeit with initial overshooting of the price level. In addition, we find no evidence of prices responding to changes in money and wages in a statistically significant manner.

Keywords: WP; price; interest rate; price level; Armenia; price dynamics; error correction model; monetary policy implementation; narrow money; monetary policy transmission mechanisms; error correction terms; treasury bill market; Exchange rates; Currency markets; Wages; Demand for money; Real exchange rates; Central and Eastern Europe (search for similar items in EconPapers)
Pages: 30
Date: 2004-12-01
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Citations: View citations in EconPapers (3)

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