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Euro-Dollar Polarization and Heterogeneity in Exchange Rate Pass-Throughs Within the Euro Zone

Mariarosaria Comunale

No 333, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: This paper provides an empirical study of the asymmetrical spillovers of the euro-US dollar exchange rate on the inflation in the euro zone, dividing the sample in two groups of countries: core and periphery. Then we test if the euro-US dollar exchange rate is still able to give a different impact on the groups’ performance as in the past US dollar-deutschmark polarization phenomenon studying the intra-euro area differences in exchange rate passthrough (ERPT), as an important element of inflation dynamics. Using a dynamic panel data framework based on an exchange rate pass-through model, we estimate the elasticities of the two groups by system IV-GMM and the common correlated effects mean group estimator, which deals with the presence of cross-sectional dependence. We conclude that the euro-US dollar is still an important factor, but not the only key factor, in determining the asymmetry in HICP inflation between core and periphery. The nominal effective exchange rate instead is an important driver for the inflation, but only considering the euro zone as a whole. The EMU seems to not have insulated enough some member countries from nominal external shocks. The nominal effective exchange rate is also a factor to take into account in order to analyze the recent low inflation in the euro zone, even if the size of the ERPT is relatively small.

Keywords: Exchange Rate Pass-Through; Dynamic Panel Data; Inflation; Exchange Rates; European Monetary Union; Cross-sectional dependence (search for similar items in EconPapers)
JEL-codes: C33 E31 F31 F36 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-opm
Date: 2015-03-13, Revised 2015-03-13
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Working Paper: Euro-dollar polarization and heterogeneity in exchange rate pass-throughs within the euro zone (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:rtv:ceisrp:333

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