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Discussion Paper

No. 2007-32 | July 17, 2007
Measuring Long-Run Exchange Rate Pass-Through

Abstract

The paper discusses the issue of estimating short- and long-run exchange rate pass-through to import prices in euro area countries and reviews some problems with the measures recently proposed in the literature. Theoretical considerations suggest a long-run Engle and Granger cointegrating relationship (between import unit values, the exchange rate and foreign prices), which is typically ignored in existing empirical studies. We use time series and up-to-date panel data techniques to test for cointegration with the possibility of structural breaks and show how the long-run may be restored in the estimation. The main finding is that allowing for possible breaks around the formation of EMU and the appreciation of the euro starting in 2001 helps restore a long run cointegration relationship, where over the sample period the fixed component of the pass-through decreased while the variable component tended to increase.

Paper submitted to the special issue "Recent Developments in International Money and Finance" edited by Ronald MacDonald

JEL Classification

C23 F14 F31 F36 F42

Cite As

Olivier de Bandt, Anindya Banerjee, and Tomasz Kozluk (2007). Measuring Long-Run Exchange Rate Pass-Through. Economics Discussion Papers, No 2007-32, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2007-32

Assessment



Comments and Questions


Anonymous - Referee Report
September 05, 2007 - 09:48

see attached file


Anonymous - Referee Report
September 10, 2007 - 11:12

see attached file


Anindya Banerjee - Response to Referee Reports
October 08, 2007 - 09:58

see attached file