Bhundia A., 2002, “An Empirical Investigation of Exchange Rate Pass-Through in South Africa,” IMF Working Paper 02/165 (Washington: International Monetary Fund).
Billmeier A., and L. Bonato, 2002, “Exchange Rate Pass-Through and Monetary Policy in Croatia,” IMF Working Paper 02/109 (Washington: International Monetary Fund).
Choudhri E., and D. Hakura, 2001, “Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?” IMF Working Paper 01/194 (Washington: International Monetary Fund).
Coricelli F., and others, 2003, “Exchange Rate Pass-Through in Candidate Countries,” CEPR Discussion Paper No. 3894 (London: Centre for Economic Policy Research).
Darvas Z., 2001, “Exchange Rate Pass-Through and Real Exchange Rate in EU Candidate Countries,” Bundesbank Discussion Paper 10/01 (Frankfurt: Deutsche Bundesbank).
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Leigh, D. and M. Rossi, 2002, “Exchange Rate Pass-Through in Turkey,” IMF Working Paper 02/204 (Washington: International Monetary Fund).
McCarthy J., 1999, “Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialised Economies,” BIS Working Paper No. 79 (Basel: Bank For International Settlements).
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Prepared by Nada Choueiri.
The share of trade in GDP has risen from about 50 percent in the early 1990s to about 70 percent in 2003.
See the References section for a list of the IMF working papers that cover this topic.
Using monthly data for 1993-2002 for Poland, Coricelli et al. (2003) find that 80 percent of an equilibrium change in the exchange rate will transmit to inflation. However, their methodology is suitable mainly for longer time periods and in countries where the underlying equilibrium exchange rate-price relationship is stable.
The addition of domestic supply shocks, following Gueorguiev (2003), is a departure from McCarthy’s model which only included the other six variables.
While there could be other reasonably justifiable identifying restrictions, the above ordering was supported by results of Granger causality tests.
This link is mainly due to policy management in these countries. Estonia and Lithuania have fixed exchange rates vis-à-vis the euro. Hungary and Slovenia’s respective exchange rates are pegged to the euro and allowed to fluctuate within horizontal bands. Slovakia closely manages its exchange rate to minimize volatility against the euro. As for the Czech republic, although it has no formal exchange rate policy, the value of its koruna is more stable versus the euro than the dollar (as can be verified by plots of the koruna/euro and koruna/dollar exchange rates.) Poland’s trade with the remaining accession countries is negligible.
The weights were chosen based on Direction of Trade statistics, which suggested that about 65 percent (35 percent) of Polish imports are priced either in euro (U.S. dollar) or in a currency closely linked to the euro (U.S. dollar).
Evidence for the CPI was mixed, with some tests suggesting it could be I(2) but others indicating it was I(1).
In other words, the cointegration of the variables was ignored—although cointegration tests indicated the presence of several cointegrating vectors. Three reasons justify this decision. First, the time-period covered by the study is too short to factor in an equilibrium relationship among the variables at hand that one could reasonably be confident with. Second, the transition process in the Polish economy in this short time period implies continuous changes in the underlying equilibrium. Third, the study’s purpose is to understand the pass-through over short horizons, for which ignoring the underlying long-run equilibrium of the economy should not significantly undermine the results.
For any variable X, the 12-period difference Xt – Xt-12 was used in the estimation. The results should therefore be interpreted in terms of year-on-year price and exchange rate changes.
The model was estimated using RATS. The standard deviations of the impulse responses were calculated by 2000 bootstrap replications of the model, using pseudo-historical data created by drawing with replacement from the empirical distribution of the VAR innovations. All responses are to one unit shock in the exchange rate, which approximates a year-on-year percentage increase in the average monthly level of the exchange rate.
PPI and CPI responses to a shock in import prices (not shown) are only statistically significant for the first three to four months.
An appreciation of the zloty is captured in the model by an increase in the NEER or in the bivariate basket rate.
Even with this modification the small sample sizes affected the efficiency of the results as impulse response functions for all shocks were generally only significant for a few months after a given shock. Therefore the results of these smaller models are only provided to illustrate the link between inflation conditions and the exchange rate pass-through.