Exchange Rate Pass-Through in the Euro Area: The Role of Asymmetric Pricing Behavior
27 Pages Posted: 15 Feb 2006
Date Written: January 2004
Abstract
Exchange rate pass-through in a set of euro area prices along the pricing chain is examined. Using a vector autoregression (VAR) approach, the empirics analyze the joint time-series behavior of the euro exchange rate and a system of euro-area prices in response to an exchange rate shock. The impulse-response functions from the VAR estimates are used to identifyin a `new open economy macroeconomics model`those key behavioral parameters that best replicate the pattern of exchange rate pass-through in the euro area. Area-wide prices are found to display incomplete pass-through, consistent with euro currency-pricing and pricing-to-market behavior. The results are compared to those for the other major industrial economies, and suggest that, as with the United States, "expenditure-switching" effects on the current account still operate but are generally small.
Keywords: Exchange Rate Pass-Through, New Open Economy Macroeconomic Models
JEL Classification: F41, F31, E31
Suggested Citation: Suggested Citation
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