Working Paper: CEPR ID: DP3894
Authors: Fabrizio Coricelli; Bostjan Jazbec; Igor Masten
Abstract: In this Paper we analyse the link between the choice of exchange rate regime and inflationary performance in four EU accession countries: the Czech Republic, Hungary, Poland and Slovenia. Estimation of pass-through effect of exchange rate changes to CPI inflation is complemented by I(2) co-integration analysis of stochastic nominal trends. The results allow a clear ranking of countries according to the size of the pass-through effect and the importance of exchange rate shocks to overall inflationary performance. In particular, we find that perfect pass-through effect can be associated with accommodative exchange rate policy, which can moreover become the most important source of inflationary pressures. The analysis suggests that for CEEC-4 the early adoption of the euro can provide the most efficient framework for reducing inflation.
Keywords: EMU; Accession; I(2) Cointegration Analysis; Passthrough Effect
JEL Codes: C32; E42; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Accommodative exchange rate policy (F31) | higher passthrough effect (H22) |
| Exchange rate shocks (F31) | CPI inflation (E31) |
| Passthrough effect varies by country (F69) | differences in inflation rates (E31) |
| Exchange rate regime + monetary policy (F33) | differences in inflation rates (E31) |
| Monopolistic behavior + wage pressures (J42) | CPI inflation (Poland) (E31) |