Bulletin n. 3/2008 | ||
February 2009 | ||
Slavi T. Slavov |
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Does Monetary Integration Reduce Exchange Rate Pass-Through? | ||
in World Economy , Volume 31 Issue 12 , 2008 , 1599 - 1624 | ||
There are several theoretical arguments for why the adoption of a common currency (either a currency union or a currency board) may reduce the exchange rate pass-through (ERPT) to domestic consumer prices. This paper examines a broad panel of 101 countries over the period 1976–2006, using two-stage instrumental-variable estimation techniques in order to resolve the potential endogeneity problem. The main result is that ERPT indeed tends to decline in countries participating in a common currency arrangement. In particular, there has been a strong reduction in pass-through in the member countries of the European Monetary Union (EMU) since the launch of the euro. Currency boards do not appear to be different from currency unions – both reduce the pass-through from depreciation to inflation. Furthermore, the negative impact of common currencies on ERPT is at work in both high-income and low-income countries. Finally, most of the reduction in pass-through to consumer prices under common currency arrangements happens somewhere along the pricing chain between the border and the supermarket shelf. | ||