Exchange Rate Pass-Through in Central and East European Countries

Abstract

This paper studies the degree of exchange rate pass-through to the prices of imports in eleven new member states (NMSs) of the European Union and one candidate country, Turkey, analyzing some of its structural determinants. This analysis is based on a vector autoregressive (VAR) model that partly includes the distribution chain of prices (import prices and consumer prices). I observe how the size and speed of the pass-through decrease along the distribution chain. Exchange rate pass-through is larger for these developing countries than that derived in previous studies of the United States and euro area. I also find evidence for Taylor's (2001) hypothesis of a positive relation between the degree of the exchange rate pass-through and inflation, observing less inflation and long-run exchange pass-through in inflation targeting countries, such as Hungary, Poland, and the Czech Republic. The relation between exchange rate pass-through and openness is unclear. Finally, I analyze exchange rate pass-through by industry, comparing results in the manufacturing and energy sectors and finding evidence of a larger response in energy than in manufacturing.