Exchange rate pass-through to import prices in Europe: a panel cointegration approach

Abstract

This paper takes a panel cointegration approach to the estimation of short-and longrun exchange rate pass-through (ERPT) to import prices in the European countries. Although economic theory suggests a long-run relationship between import prices and exchange rate, in recent empirical studies its existence has either been overlooked or it has proven difficult to establish. Resorting to novel tests for panel cointegration, we find support for the equilibrium relationship hypothesis. Exchange rate pass-through elasticities, estimated by two different techniques for cointegrated panel regressions, give insight into the most recent development of the ERPT. Keywords Exchange rate pass-through • Import prices • Panel cointegration • Cross-sectional dependence • Common factors JEL Classification C12 • C23 • F31 The author is grateful to Boris Blagov and to the participants at the 25th International Panel Data Conference in Vilnius, Lithuania, for helpful discussions and to two anonymous referees and the Associate Editor for their constructive comments and suggestions.

Exchange rate pass‐through to import prices: Evidence from a heterogeneous panel of West African countries

“…Kılıç (2010) shows that the complete or incomplete nature of pass‐through is strongly related to the magnitude of the exchange rate shock and level of inflation in Organisation for Economic Co‐operation and Development countries in both the long and short term. Based on a cointegration panel, Arsova (2020) shows that a long‐run relationship exists between import prices and exchange rate variations in certain European countries. However, this relationship remains partial; that is, it leads to incomplete pass‐through.…”

“…The results of this particular study indicate that most of the differences in the pass‐through of the exchange rate to import prices are due to three macroeconomic determinants: exchange rate regimes, trade barriers, and inflation regimes. Arsova (2020) analyzes the pass‐through effect of the exchange rate on import prices in European countries. This study uses two estimation methods.…”

“…macroeconomic determinants: exchange rate regimes, trade barriers, and inflation regimes. Arsova (2020) analyzes the pass-through effect of the exchange rate on import prices in European countries. This study uses two estimation methods.…”

Exchange rate uncertainty and import prices in the euro area

“…dataset several studies find evidence for, and model, cointegration explicitly (Arsova, 2019;Brun-Aguerre & Fuertes, 2012;Cheikh & Louhichi, 2015;De Bandt et al, 2008).…”

“… For example, supply and demand theory suggests a tight relationship between price and quantity, which in this specification relates to industrial production and industrial production prices. In the context of ERPT and depending on the dataset several studies find evidence for, and model, cointegration explicitly (Arsova, ; Brun‐Aguerre & Fuertes, ; Cheikh & Louhichi, ; De Bandt et al, ). …”