Exchange Rate Pass-through to Consumer Prices in the European Transition Economies

Exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyse exchange rate pass-through to consumer prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to consumer prices to examine its distribution to the internal pricing chain. Our results suggest that there are different patterns of exchange rate pass-through to domestic prices according to the baseline period as well as the exchange rate regime diversity.