The Phenomenon of Incomplete Exchange Rate Pass-Through to Prices in the Euro Area

The main aim of the article is to present the influence of exchange rate fluctuations on the price dynamic in the Euro Area. The knowledge concerning the level of exchange rate pass-through to prices allows assessing how exchange rates affect on inflation and monetary policy in given states. The article consists of two parts. The first component deals with theoretical analysis of the phenomenon of incomplete exchange rate pass-through to prices, including reasons and factors determining the range of this phenomenon. In the next part of article, there is analyzed the range of exchange rate pass-through to prices in the Euro Area by using the Vector Autoregression Model (VAR). There are estimated coefficients of exchange rate pass-through to import, producer and consumer prices on the base of impulse response function. Then, there is made decomposition of the price index variance in order to assess the degree of price determination by exchange rate changes.