10/2003 Aurelijus Dabusinskas. Exchange rate pass-through to Estonian prices

Working Papers of Eesti Pank. No 10, 2003

The objective of the paper is to further our understanding of the relationship between changes in the nominal exchange rate and prices in a small open economy. The paper uses data from 1995 Q1-2003 Q1 for Estonia to investigate the exchange rate pass-through to import, producer and consumer prices, both total and disaggregated. Although the currency board arrangement eliminates exchange rate fluctuations from a very significant share of the Estonian effective currency basket, the remaining variation in the nominal exchange rate can be regarded as exogenous (determined by the anchor currency), a useful feature when estimating the pass-through. In the case of import unit values, the pass-through tends to be statistically significant for textiles and commodity-type goods, such as petroleum, non-metal mineral products and basic metals. In the case of producer prices, the long-run pass-through is evident in textiles and chemical products. Point estimates of the long-run pass-through to aggregate import and producer prices fall between 40 and 50%, though the precision of these estimates is low. In contrast, no significant exchange rate pass-through is estimated to consumer prices, measured by total CPI or its tradable component.

* CERGE-EI, Charles University, Prague. This research was carried out during the three months that the author spent as a visiting researcher at Eesti Pank. The author is grateful to Marit Hinnosaar, Reimo Juks, Rasmus Kattai, Peeter Luikmel, Hannes Kaadu, Martti Randveer, Tairi Rõõm, Lenno Uusküla as well as seminar participants at Eesti Pank for helpful comments and suggestions. The author also thanks Dina Kazakova, Pille Palojärv, Merle Saaliste, Eveli Sokman, Aive Veelmaa, Natalja Viilmann for help with data. The usual disclaimer applies.

Author's e-mail address: aurelijus.dabusinskas [at] cerge-ei.cz

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.

Table of Contents

1. Introduction
2. Methodology and Data
3. Estimation and Results
3.1. Exchange Rate Pass-Through to Import Prices
3.2. Exchange Rate Pass-Through to Producer Prices
3.3. Exchange Rate Pass-Through to Aggregate Import and Producer Prices
3.4. Exchange Rate Pass-Through to Consumer Prices
4. Concluding Remarks
Appendix A
Appendix B

Exchange Rate Pass-Through to Estonian Prices, Working Papers of Eesti Pank No 10, 2003 (PDF*)

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