How different is the exchange rate pass-through in new member states of the EU? Some potential explanatory factors

Abstract

This paper uses data on import unit values for nine different product categories and bilateral imports to study the pass-through of exchange rate changes into the prices of imports that originated inside the Euro Area made by some New Member States (NMSs) of the European Union and one candidate country (Turkey). I estimate industry-specific rates of pass-through across and within countries using the methodological approach proposed by de Bandt, Banerjee and Kozluk (2008). I did not find evidence in favour of the hypothesis of Local Currency Pricing (zero pass-through) and the hypothesis of Producer Currency Pricing (complete pass-through) could be accepted in some countries for different industries. My results also show that there is a clear positive relationship between exchange rate pass-through and average inflation in these countries. I do find a slightly positive pattern for the relationship between exchange rate pass-through and openness. With reference to the relationship between exchange rate pass-through and the type of exchange rate regime I observe that a less volatile exchange rate implies a less degree of exchange rate pass-through. In industries I obtain a less degree of exchange rate pass-through in differentiated manufactured products. By including possible statistical break-dates in the estimation process I observe that some NMSs have decreased the exchange rate pass-through in recent years. Some of the breaks are close to the dates of some major institutional changes in these countries (changes in monetary policy and exchange rate regimes and the starting up of the EU membership).