Exchange rates and import prices for a small open economy: the case of Ireland

Abstract

As a further contribution to the growing international literature on exchange rate pass-through (PT), this study assesses the extent of PT for Irish import prices over the period 1963 to 1995. It fills two important gaps in the literature, by making due allowance for the time series properties of the data and by concentrating on the case of a small open economy. In order to assess the extent of PT a mark-up model for aggregate import unit values is employed. It is argued that the usual single equation mark-up estimation technique leads to seriously biased and inefficient estimates of the degree of PT, as it ignores the strong simultaneity of import prices and domestic competing prices. This study makes use of the Johansen technique to allow for such simultaneity and uncovers two long-run equilibrium relationships among the data, for import unit values and domestic competing prices, and confirms the existence of very close to full PT for both. Previous results in the literature demonstrating substantially less than full PT may be due to the failure to make proper allowance for the time series properties of the data or for the strong simultaneity which exists between import and domestic competing prices.

Exchange Rate Pass-through to Consumer Prices: A European Perspective

“…We are primarily interested in the overall effect of exchange rate changes on consumer prices, an issue which is most relevant for monetary policy. Thus, we agree with Kenny and McGettigan (1998) who state: "The partial nature of disaggregated studies means that findings of incomplete PT [pass-through], while very interesting in themselves, should not be adduced as evidence that this result carries over to the broader macroeconomy." (p. 1148).…”

“…He finds that the exchange rate contributes significantly to producer prices which is supported by subsequent Granger causality tests. Kenny and McGettigan (1998) also use cointegration analysis and vector error correction models to study exchange rate pass-through for Ireland. Comparing their results with previous studies they find that the degree of pass-through in their study is higher.…”

“…This also holds for the only euro area study so far (Ranki, 2000). Following the work of Kim (1998) and Kenny and McGettigan (1998), and in contrast to McCarthy (2000) who applies VAR analysis, we use cointegration analysis and vector error correction models to take account of the nonstationarity of several variables. Third, we focus on aggregate data rather than on certain industries or products.…”

Exchange rate pass-through to domestic prices: the case of Colombia

“…Such a specification was tried on the Colombian data, but the normality test of the residuals was rejected, and the test results were, therefore, not valid. A specification on the form (s, imp, exp * ), where exp * is the 24 See, for example, Hüfner and Schröder (2002), Kenny and McGettigan (1998), Kim (1998), Menon (1995b), Murgasova (1996), and . 25 See also Johansen (1990Johansen ( , 1991Johansen ( , 1995.…”

“…Such studies include, for example,Hüfner and Schröder (2002),Kenny and McGettigan (1998),Menon (1995b), andMurgasova (1996).…”