Pass-Through of Exchange Rates to Domestic Prices in East European Countries and the Role of Economic Enviroment

Martins Bitans
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Martins Bitans: Bank of Latvia

No 2004/04, Working Papers from Latvijas Banka

Abstract: The paper examines the exchange rate pass-through in a set of 13 East European countries during the period of 1993–2003. The pass-through estimates are derived from a recursive VAR model in first differences, and the impact of exchange rate changes on both producer and consumer prices is studied. The estimates obtained for two sub-sample periods generally show an incomplete pass-through over a two-year horizon. In addition, the results imply a considerable cross-country variation and suggest that a significant decline (by nearly 50%) in the pass-through is possible over time. In particular, it is found that the exchange rate pass-through in East European countries is positively and statistically significantly related to the average inflation rate and degree of exchange rate persistence. Moreover, the results confirm the existence of a strong relationship between the pass-through and changes in the import structure. Finally, there is some limited evidence that the magnitude of exchange rate pass-through might be positively related to the degree of country's openness to foreign trade.

Keywords: pass-through of exchange rate; recursive VAR model; Exchange Rate Mechanism II (search for similar items in EconPapers)
JEL-codes: C32 E31 E52 (search for similar items in EconPapers)
Date: 2004-12-30
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Citations: View citations in EconPapers (24)

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