DP3894 Exchange Rate Pass-Through in Candidate Countries

Author(s): Fabrizio Coricelli , Bostjan Jazbec , Igor Masten

Publication Date: May 2003

Keyword(s): I(2) co-integration analysis , emu accession , pass-through effect

JEL(s): C32 , E42 , E52 , E58

Programme Areas: Transition Economics

Link to this Page: www.cepr.org/pubs/dps/DP3894.asp

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.