Asymmetry of the exchange rate pass-through: An exercise on the Polish data 1

Transcription

1 Asymmery of he exchange rae pass-hrough: An exercise on he Polish daa Jan Przysupa Ewa Wróbel 3 Absrac We propose a complex invesigaion of he exchange rae pass-hrough in a small open economy in ransiion. We assess he level, lineariy and symmery of exchange rae pass-hrough o impor and consumer prices in Poland and discuss is implicaions for he moneary policy. We show ha he pass-hrough is incomplee even in he long run. There is pricing o marke behaviour boh in he long and shor run. We do no find a srong evidence of non-lineariy in impor prices reacion o he exchange rae and rejec he hypohesis of an asymmeric response o appreciaions and depreciaions. On he oher hand, we find an asymmery of CPI responses o he oupu gap, direcion and size of he exchange rae changes and o he magniude of he exchange rae volailiy. The asymmery is mosly visible afer exogenous shocks. We rejec he hypohesis of an asymmeric reacion of prices in a high and low inflaion environmen. 4 JEL Classificaion: C, E5, F3. Key Words: Exchange Rae Pass-hrough, Non-linear Model. We are hankful o Michael Frömmel, Ryszard Kokoszczyński and Tomasz Łyziak for many helpful commens. Naional Bank of Poland and Insiue for Marke, Consumpion and Business Cycles Research, Warsaw; corresponding auhor: Jan.Przysupa@nbp.pl 3 Naional Bank of Poland. 4 The usual disclaimer applies.

2 . Inroducion (non-echnical summary) Undersanding how prices respond o exchange rae is of key imporance for any small open economy, in paricular, for he economies in ransiion wih a free floaing exchange rae. Poland is an example of such counry. In his paper we show he main properies of he exchange rae pass-hrough in Poland and assess heir implicaions for he moneary policy. Our analysis covers a period , which is characerized by a homogenous moneary policy (inflaion argeing, flexible exchange rae) and a generally falling inflaion rae. We assess he degree of pass-hrough o impor prices, examine if hey exhibi pricing o marke behaviour and wheher hey reac o he exchange rae symmerically. We find ha pricing o marke exiss, boh in he long run and in he shor run, bu rejec he hypohesis of asymmeric reacion o he exchange rae. Then, we pass o he CPI, show he level of passhrough and examine wheher he process is symmeric. In conras o impor prices, in he case of CPI we find some asymmeries wih respec o he oupu gap, direcion and size of exchange rae change and is variabiliy. We do no find asymmery regarding inflaion environmen. Finally, we discuss implicaions for he moneary policy. To our knowledge, boh pricing o marke and asymmeric reacions of impor prices and CPI have no been explored on he Polish daa. The exising Polish lieraure on he pass-hrough is no paricularly abundan. I is mosly based on McCarhy (000) where he impac of a sequence of supply, demand and exchange rae shocks on he impor, producer and consumer prices is examined, see Przysupa (00), Cholewiński (008). Since i is a popular mehod, for he sake of comparabiliy wih oher sudies, we also provide resuls we have obained his way. They are shown in ables A-A4 in he appendix. Generally, pass-hrough of he exchange rae changes o he impor prices do no vary over ime and slighly exceeds 0.7 afer 8 quarers. On he oher hand, pass-hrough o he consumer prices exhibis a noable fall: i dropped by half over he period from 0.4 o 0.. Such high pass-hrough effec a he earlier sages of ransformaion can be inerpreed as a resul of fas srucural changes in he economy, while he huge drop of he pass-hrough in he las years as an inernaionalizaion of he Polish economy due o a massive inflow of he expor-oriened foreign direc invesmen. Figures for he pass-hrough effec o he impor prices are close o resuls for oher developed economies; whereas figures for he consumer prices differ considerably (hey are close o he resuls esimaed for for he counries wih he direc inflaion argeing, see Ihrig e al. (006). Pass-hrough o he impor prices, esimaed wih oher mehods gives similar resuls - we can safely say ha he long-run pass-hrough for boh nominal effecive exchange rae and he bilaeral exchange rae lies wihin he range of ; moreover, a srong evidence of pricing o marke is confirmed. Esimaing a dynamic equaion for impor prices we show ha insananeous pass-hrough is 0.5 much lower han in he long run and here is weaker evidence of pricing o marke. Also, he error correcion works quie efficienly: 46% of disequilibrium is eliminaed wihin one quarer. Checking he nonlineariy of impor prices reacion o appreciaions and depreciaions we find ha if here is appreciaion of he Polish currency wih respec o he euro hen he effec of he insananeous pass-hrough is 0.55 and here is pricing o marke. 65% of disequilibrium is eliminaed wihin one quarer. A differen picure emerges for he depreciaion periods: neiher pricing o marke nor error correcion mechanism seems o operae. The only facor affecing impor prices is he exchange rae. The pass-hrough effec is We canno rejec he hypohesis ha pass-hrough in depreciaions

3 and appreciaions is equal and enaively conclude herefore, ha here is no asymmery in impor prices reacion o he exchange rae. For he CPI we found he srong asymmery of he pass-hrough effec along he business cycle: his effec may exceed 0.7 in he early expansion, and hen i drops o in he peak and o around zero in he early recession. During he lae recession and he rough i is growing up o and o over 0.7 in he early expansion. This is coheren wih he behaviour of enerprises in he business cycle, condiioning heir invesmen decisions on expeced profis wih a maximum in he early expansion and a minimum in he early recession. On he oher hand, a srong asymmeric reacion was idenified in he periods of appreciaions and depreciaions. If he zloy appreciaes, he pass-hrough o he consumer prices declines and varies from 0.0 o During he depreciaions or sligh appreciaions, he passhrough effec equals 0.4. Also regarding volailiy he pass-hrough effec seems o be srongly asymmeric: for he volailiy over 4.3% i is equal o 0.5, and 0.55 oherwise. The lower pass-hrough in case of higher volailiy can reflec he producers relucance o frequen price changes due o he menu coss. Examining he role of he inflaion environmen in he exchange rae pass-hrough behaviour we do no obain a clear picure, hence we decide o rejec he hypohesis ha he asymmery exiss.. Brief review of he lieraure Theoreical exchange rae pass-hrough lieraure is dominaed by papers dealing wih he degree of price adjusmen and facors ha affec pass-hrough. The discussion sared afer numerous ess on variey of goods and across counries yielded very lile evidence supporing an assumpion of he absolue or relaive Purchasing Power Pariy (Rogoff (996), Ihrig e al. (006).. One srand of he lieraure invesigaes pass-hrough sressing he role of marke organizaion, produc segmenaion, pricing o marke and compeiion as facors explaining why i is incomplee. In a seminal paper, Dornbusch (987) poins ou ha firms operaing under imperfec compeiion may adjus mark-ups in response o he exchange rae shock. Froo and Klemperer (989) show ha if marke share maers for fuure profis, hen firms facing an exchange rae appreciaion will decide wheher o raise curren or fuure profis, depending on heir percepion of durabiliy of he appreciaion. This srand of lieraure is closely relaed o he problem of pricing o marke behaviour and we shall characerize i in more deails in secion, where we describe he model of impor prices. In he second srand of his lieraure, pass-hrough is reaed as a phenomenon affeced by he moneary policy. In a seminal paper Taylor (000) suggess ha price responsiveness o he exchange rae is posiively relaed o he inflaion rae. Bailliu and Fujii (004) find ha a ransiion o a low inflaion environmen induced by a shif in moneary policy is a cause of a declining pass-hrough. Devereux and Yeman (00) build a model in which sicky prices resul from menu cos of price adjusmen. Moneary policy deermines he average rae of inflaion and exchange rae volailiy. Firms are allowed o choose frequency of price adjusmen and opimal frequency varies wih he moneary policy regime. For a given menu cos, he higher he rae of inflaion and he more volaile he exchange rae, he higher he 3

4 frequency of price adjusmen decisions aken by firms and he higher he pass-hrough effec. As a resul Devereux and Yeman argue, ha pass-hrough is endogenous o moneary policy. Devereux, Engel and Sorgaard (003) analyze he deerminans of an exporing firm s choice of currency in which i pre-ses prices. Wih nominal price sickiness, he aggregae degree of exchange rae pass-hrough is deermined by his decision. They develop a model of an endogenous exchange rae pass-hrough, in a framework in which he exchange rae iself is also endogenously deermined. They find a wo-sided relaionship, namely ha exchange rae volailiy deermines he price seing behaviour of a firm, and herefore he degree of he pass-hrough, and ha he degree of he pass-hrough deermines he volailiy of an exchange rae. On he oher hand, Campa and Goldberg (00) show ha higher inflaion and exchange rae volailiy are weakly associaed wih higher pass-hrough. To sum up his par of he lieraure overview, facors ha explain an incomplee pass-hrough in he long run can be considered microeconomic, whereas hese affecing is degree in he shor run macroeconomic. Lineariy and possible asymmery are invesigaed less frequenly, even hough a quesion wheher hey exis is imporan if no crucial for he moneary auhoriies. Linear response means ha prices reac in he same way o big and small changes in he exchange rae. Many papers raher assumed lineariy han esed i. Bu if here are some menu coss of price adjusmen, hen relaively small changes in he exchange rae may no be passed ono prices. Only afer exceeding a cerain hreshold hese changes migh be passed on cusomers. On he oher hand, if domesic prices reac more o, say, depreciaions han o appreciaions, meaning here is an asymmery in he price reacion o he exchange rae changes, i may reflec disorions in he markes, weak compeiion in paricular. Bussière (007) provides assumpions and discusses he economic meaning of boh quadraic and cubic non-lineariies. The quadraic case relies on hree assumpions: (i) ha expor prices are rigid downwards (ii) ha quaniies of expored goods are rigid upwards (exporing firms work a full capaciies) and (iii) ha exporing firms care abou heir marke share. Exporers ry o offse a fracion of exchange rae movemens, and his fracion varies wih he magniude of he exchange rae changes. For a larger appreciaion, he reacion of expor prices decreases, whereas for a large depreciaion increases. Also, in appreciaions exporers reduce heir prices by a larger amoun, because hey fear losing marke share. The cubic case relies on he assumpion of he exisence of menu coss on he side of boh exporers and imporers. If he former is rue, hen exporers only slighly adjus prices in heir currency in response o he exchange rae changes, while hese changes are refleced in he impor prices. If he menu coss are a he side of imporers, he exporing firms adjus prices o offse small changes in he exchange rae. Recenly he gap beween empirical lieraure assuming lineariy and symmery and ha esing i has been shrinking. Early works on his opic are Mann (986) and Goldberg (995); boh find asymmeries in consumer prices reacion o appreciaions and depreciaions. More papers appeared only afer he year 000. Devereux and Yeman in he paper menioned above use a cross-secion ime series model o show ha here is a non-linear relaionship beween he degree of pass-hrough and inflaion rae. As inflaion rises, pass-hrough increases oo bu a a deceleraing rae. Pollard and Coughlin (003) examine he symmery in response of impor prices in manufacuring o appreciaions and depreciaions as well as o he size of he change of he exchange rae in he US and show ha here is some asymmery in 4

5 response of impor prices in differen indusries. They find no clear direcion of he asymmery across indusries, however, and conclude ha pass-hrough is posiively relaed o he size of he change in he exchange rae. Campa e al. (006) examine non-lineariy in impor price adjusmen in he EU (5). They explore hree ypes of non-lineariies: adjusmens which are no proporional o he size of he deviaion, adjusmens which are non-symmerical o he sign of he deviaion and finally hresholds below which no adjusmen akes place. Using daa on he indusry-level hey obain a srong evidence for he presence of nonlineariies in he adjusmen owards long-run equilibrium in cerain indusries. They also find evidence for he exisence of hresholds of no adjusmen cenred on zero. The hresholds seem o be much lower for he manufacuring han for he commodiy indusries. Herzberg e al. (003) use aggregae daa for he UK. They do no find evidence of non-lineariy in he reacion of impor prices. Bussière (007) invesigaes wheher expor and impor prices of G7 counries exhibi linear and symmerical reacion o he exchange rae movemens. He finds ha a non-linear effec canno be negleced, alhough he direcion of he asymmeries and he magniude of non-lineariies vary across counries. Wickremasinghe and Silvapulle (004) find ha in Japan impor prices of manufacuring display a saisically significan difference in heir adjusmen o appreciaions and depreciaions and ha he reacion o he former is bigger han o he laer. There is less evidence of impor price reacions in he emerging markes. Alvarez e al. (008) repor a weak asymmery beween he reacion of impor prices o appreciaions and depreciaions in Chile. They examine uni impor values and wholesale impor prices, he former aggregaed ino hree subcomponens by end use: consumer, inermediae and capial goods; he laer disinguished impored goods from hree secors mining, agriculure and indusry. They find ha coefficiens for depreciaions are higher han for appreciaions, bu null hypohesis ha boh coefficiens are equal is no rejeced only marginally for capial goods; for agriculure only depreciaions are passed ino impor prices. Lieraure dealing wih he consumer price index is even scarcer. Goldfajn and Werlang (000) use a panel of 7 counries and repor an asymmeric reacion of pass-hrough over he business cycle. Correa and Minella (006) invesigae non-lineariies in pass-hrough o consumer prices in Brazil. They esimae a Phillips curve wih a hreshold for he passhrough and show ha he magniude of a shor run pass-hrough is higher when he economy is growing faser, when he exchange rae depreciaes above a cerain hreshold and surprisingly when exchange rae volailiy is lower. Posedel and Tica (007) use a TAR model on Croaian daa and find a single hreshold of a monhly change in he exchange rae below which i does no affec consumer price inflaion. Khundrakpam (007) finds asymmery of pass-hrough relaed o he direcion of he exchange rae changes in India. To sum up, here is growing evidence showing he exisence of various ypes of nonlineariies boh on he firs sage of he pass-hrough, i.e. impor prices, as well as on he las sage i.e. consumer prices. Our paper fis in his ype of lieraure. The firs par is devoed o he analysis of impor prices: we sar wih a linear equaion, and aferwards es wheher i is mis-specified, i.e. wheher i lacks non-linear erms. We do no find srong evidence for non-lineariies, bu i seems ha in depreciaions and appreciaions differen mechanisms of adjusmen operae. In appreciaions of he home currency wih respec o he euro pricing o marke seems o have some impac on impor prices. However, his impac disappears in depreciaions. The nex par of he paper is focused on reail prices. We esimae hreshold models and models based 5

6 on nonreversibiliy of he linear funcions and find an asymmeric reacion of consumer prices o appreciaions and depreciaions, o he volailiy of he exchange rae, and, in he models based on nonreversibiliy, o he business cycle flucuaions. The impac of he inflaion environmen does no show any apparen asymmery. 3. Impor price model There is a vas lieraure poining ha impor prices can be affeced by domesic prices. The phenomenon is known as pricing o marke (henceforh PTM). I was perceived as a resul of marke imperfecions (monopolisic power of price seers) and marke segmenaion, since in his case producers can charge a mark-up on coss. The mark-up depends on he elasiciy of demand for a given produc and his in urn is deermined by compeiors prices. Facing a change in he exchange rae, producers can decide wheher and o wha degree he mark-up should absorb hese changes. For example, if he domesic currency of an exporing firm depreciaes, i can refrain from increasing is mark-up o build a fuure marke share. Firms having a power o conrol heir prices can charge differen prices in differen markes. Pricing o marke can herefore explain why pass-hrough ends o be incomplee. Furher analyses of PTM show however, ha imperfec compeiion ogeher wih marke segmenaion is no a sufficien condiion for a persisenly low degree of pass-hrough 5. In his vein, Bergin and Feensra (00) use a general equilibrium model o show ha segmened markes wih idenical preferences canno explain incomplee pass-hrough in conras o segmened markes wih differen preferences. Therefore, hey consider ranslog preferences in which he elasiciy of demand varies wih he price a firm ses. Corsei and Dedola (00) analyze marke segmenaion resuling from a verical ineracion beween monopolisic producers and reailers. They showed ha due o he presence of downsream reailers, upsream firms wih monopoly power may face differen demand elasiciies in naional markes even under symmeric consan elasiciy preferences across counries. Monopolisic firms opimally se differen prices o domesic and foreign dealers, and herefore he law of one price fails o hold a producer and consumer levels. In his paper we use a model which is common in he lieraure on pass-hrough effec (e.g. Goldberg, Kneer (997), Bache (00), Bahroumi (006). We assume ha an exporing firm has some conrol over is price in he imporing counry. Namely, i ses he price as a markup over is marginal cos. In he imporing counry, impor price expressed in is own currency is equal o he exporing firm s price muliplied by he exchange rae. Thus: () () P = λ C, F F P = E P = Eλ C, IMP F F F where P represens expor prices of a foreign counry, in a foreign counry, λ is a firm s mark-up in he imporing counry, IMP and P sands for impor prices of a home (imporing) counry. F C is a marginal cos of producion E is he exchange rae, 5 For a more deailed discussion see for example Herzberg e al. (003), or Bache (007). 6

7 Mark-up depends on he compeiive pressure from imporer s domesic producion and demand pressure, Y. Compeiive pressure can be expressed as a relaion beween domesic prices and foreign prices in erms of imporer s currency: H P H β (3) λ = K ( Y ) F EC Combining () and (3) gives: α (4) ( ) ( ) α α IMP F H H β P = K EC P ( Y ), aking naural logs (depiced in lower case) we have: (5) ( ) ( ) p = κ + α e + α c + αp + βy. IMP F H H 0< α <, 0< β < and K is consan. In pracice i is ofen difficul o obain in he empirical sudy equal parameers a he exchange rae and foreign prices ha usually serve as a proxy for coss in he exporing counry. Bache (00) and Barhoumi (006) sress ha exchange raes are more volaile han coss, herefore he exen o which hey are passed on prices may differ. One usually sars esimaions wihou his resricion and ess i in he nex sep. Thus, he esimaed equaion is: p IMP = α + α e + α c F + α p H + α y H + ε. (6) We shall proceed his way. Some auhors also poin ha domesic demand ofen urns ou o be saisically insignifican (see for example Bussière (007)). The raionale for ha is simple: informaion ha is conained in he measure of demand pressure can be already incorporaed in anoher variable, noably in domesic prices. This is why his erm is frequenly omied in esimaions. To verify wheher i is jusified o allow for he oupu pressure in he dynamic (shor-run) equaion, we have checked he correlaion beween he oupu gap measure (a difference beween acual and HP-filered GDP) and he change in domesic prices i was quie high, namely 0.538, herefore we decided no o plug he oupu gap ino he equaion. 3.. Esimaion mehod and daa Many sudies of he pass-hrough effec are based on shor-run dynamic equaions. Such esimae has also been made for Poland (Przysupa (00), Cholewiński (008)). In his paper we presen esimaes of a long-run reacion of impor prices o he exchange rae. If variables are coinegraed, as hey seem o be in his case, hen limiing he analysis o he shor-run would reduce he informaion conen. On he oher hand, coinegraion analysis requires daa span ha is sufficien for inferences on equilibrium levels of he variables. Our analysis covers an eleven-year period only (997.Q 008.Q). I is relaively shor, which makes our conclusions somewha risky. I needs o be sressed ha esimaion of asymmery of exchange rae pass-hrough relies on an even smaller number of observaions, since our sample mus be divided ino wo sub-samples ha reflec wo differen saes, e.g. appreciaion and depreciaion or big and small changes of he exchange rae. Our resuls should herefore be reaed as guidelines raher han sharp poin esimaes. 7

8 Taking ino accoun he shorness of our sample and he small number of usable observaions, we decided no o confine he analysis o one mehod only, bu whenever possible o use more o reduce uncerainy concerning robusness of our resuls. Thus, in he case of impor prices we use Johansen coinegraion mehod and fully modified leas squares. The laer is paricularly well suied if here are problems wih endogeneiy and serial correlaion. I is imporan o noe ha he period covered in his paper is relaively homogenous in erms of a moneary policy regime, namely inflaion argeing and flexible exchange rae. This makes he esimaion easier and more reliable and herefore parially offses he drawbacks of he ime span shorness. On he oher hand, he EU enry in 004 consiued a significan disurbance o he real economy. There was an increase in inflaion, bu also wha is more imporan for his sudy he role of exchange rae as a variable affecing he real secor of he economy has sared o change since hen. Due o an increasing role of inra-company rade, he impac of he exchange rae on he aggregae demand diminished (see also Łyziak e al. (008) and Przysupa and Wróbel (006) 6. Moreover, Poland s foreign exchange marke sared o be increasingly impaced by he euro, whereas he posiion of he US dollar was falling. We begin our esimaions wih he nominal effecive exchange rae, bu hen resric our discussion o he impor prices behaviour wih respec o he bilaeral exchange rae (EUR/PLN 7 ). One reason is he big share of impors from he EU in he oal impors (abou wo hirds in 007), anoher is he fac ha impors from he euro area consis mosly of manufacured producs. Pricing o marke and asymmeries in he pass-hrough, i.e. he issues ha are in he cenre of our ineres, are a feaure of manufacuring raher han raw maerials. Since our aim is o check wheher he exchange rae pass-hrough in Poland is linear and symmeric, we sar wih a linear equaion and hen es wheher quadraic and cubic erms are lacking in he dynamic equaion. Then we check wheher impor prices reac asymmerically o appreciaions and depreciaions. In he esimaion we use quarerly daa. They are seasonally adjused wih X. The only excepion is he nominal exchange rae, which is no adjused since, in he case of Poland, i is no significanly affeced by seasonal facors. To assess he role of PTM, we use Producer Price Index (source: Main Saisical Office (GUS)); due o he daa problems ill he end of 999 i is an overall index, whereas since 000 i comprises goods produced for he domesic marke only. As shown by graph A5 in he Appendix, he overall index and he index of prices for domesic marke sared o diverge mosly in 004, hus we assume ha his should no significanly influence our resuls. As a proxy for foreign prices we use euro area expor prices (source: Eurosa). We do no employ uni expor values of Poland s main rading parners. Silver (007) poins ha uni expor values can be subsanially biased in represening expor and impor prices. Impor price daa come from GUS, whereas nominal exchange rae (quarerly average) - from he Naional Bank of Poland. All daa are in logs, he base year for price indices is 000. As i is clear from able A9 foreign and domesic prices as well as he exchange rae are non saionary. One may have some doubs wheher impor prices are saionary. ADF es shows ha seasonally adjused daa wih an inercep can be considered as I(0), whereas raw daa are 6 The auhors show changes in he exchange rae regime and he role of he exchange rae in he moneary ransmission. 7 Upside movemen of he exchange rae means appreciaion. 8

9 raher non-saionary. Johansen es (Table A5 A7) indicaes ha here is one coinegraing relaion, herefore we rea impor prices as an I() variable Esimaion resuls As we have menioned above, here is one coinegraing equaion of impor prices, domesic prices, foreign prices and he exchange rae. Boh nominal effecive exchange rae (NEER) and he bilaeral exchange rae give he coinegraion. The coinegraing vecor is presened in ables A8 and A9. We sar esimaes wih he unresriced vecor all variables have a proper sign. Conrary o domesic prices, foreign prices are no significan. Significance of domesic prices means ha here is pricing o marke behaviour in he long run. The long-run exchange rae pass-hrough is 0.9 for he nominal effecive exchange rae and 0.7 for he bilaeral exchange rae. Now we pass o he resriced version of he coinegraing relaion. Firs we check wheher he coefficiens a NEER (or he bilaeral exchange rae) and coefficiens a foreign prices are equal. In boh cases a Chi-square es shows ha we canno rejec his hypohesis. In he resriced version he pass-hrough is approximaely 0.8 for boh NEER and he bilaeral exchange rae. All variables are saisically significan, and he significance of domesic prices implies he exisence of a pricing o marke effec. Nex, we check wheher he passhrough effec is full. This hypohesis is no rejeced a he % level for he bilaeral exchange rae bu rejeced for he nominal effecive exchange rae. Neiher he resricion α = α =, α 3 =0 (he law of one price) nor he resricions α = α, α + α 3 = (uni homogeneiy) and α = α = (uni coefficiens on he exchange rae and foreign prices) for he bilaeral exchange rae can be rejeced a he % level. For he nominal effecive exchange rae only he law of one price canno be rejeced a he % level. All hese resricions, wih excepion of he law of one price for he bilaeral exchange rae are rejeced a 5% significance level; his however can be rejeced a he 0% level. All in all, we conclude ha while for he nominal effecive exchange rae he resuls seem quie clear, for he EUR/PLN exchange rae we need a cross-check. To have a clearer picure we esimae he model wih FMLS and hen impose he same se of resricions. Table A9 (righ hand panel) shows ha, wih he excepion of foreign prices, in he unresriced coinegraing vecor all parameers are saisically significan, and all coefficiens obained wih hese wo mehods are similar. The poin esimae of long-run passhrough is Daa show ha here is long-run pricing o marke. As previously, resricion α = α canno be rejeced. Once again, all parameers are saisically significan. Conrary o he resuls obained wih he Johansen mehod, all remaining resricions are rejeced a he % level of significance. To sum up his par of our esimaes, we can safely say ha he long-run pass-hrough for boh he nominal effecive exchange rae and he bilaeral exchange rae lies wihin he range of , and ha here is equaliy of he coefficiens of he exchange rae and foreign prices. There is no srong suppor in he daa for he exisence of he law of one price, uni long-run coefficiens on he exchange rae and foreign prices, and long-run uni homogeneiy in 8 Hjalmarsson and Öserholm (007) show ha Johansen s race es and maximum eigenvalue es may bring erroneous resuls under he siuaion of nearly inegraed variables. They sugges performing addiional es which relies on a sysem of resricions imposed on he coinegraing vecor. We have performed his es and do no rejec he hypohesis ha he variables are coinegraed in he long run. 9

10 domesic and foreign prices. A final sep in he coinegraion analysis is he es of exogeneiy. All esed variables - exchange rae, foreign prices and domesic prices - seem o be weakly exogenous. (Table A0). Exchange rae is srongly exogenous, bu domesic producer prices are no 9. Then we esimae a dynamic equaion for impor prices using coinegraing vecor obained from he FMLS, namely: (7) IMP F H IMP β0 β β, i i β3, i i β4, i i β5, i i i= 0 i= 0 i= 0 i=, p = + EC + e + p + p + p + v where EC is he error correcion erm and sands for he firs difference of a variable. Afer eliminaion of saisically insignifican parameers we ge he following resuls (Table A): insananeous pass-hrough is 0.5 much lower han in he long run, here is weaker evidence of pricing o marke in he shor run han in he long-run. On he oher hand, he error correcion works quie efficienly: 46% of disequilibrium is eliminaed wihin one quarer. To check wheher impor prices reac in a non-linear way o he exchange rae we perform a es similar o he Ramsey s RESET es, bu wih he Taylor expansion for he non-linear funcion 0. I should reveal wheher our equaion lacks square or cubic erms. There is no srong evidence of he lacking square erms (Saisic F(.39) =0.67 sign. level 0.6, LM()=0.99 sign. level 0.58). However, i is possible ha here is a very weak cubic nonlineariy (F(,38) =.00 sign. level 0.5, LM()=4.9 sign. level 0.). Our nex sep is o examine how changes in he exchange rae are ransmied o he impor prices in he periods of appreciaion and depreciaion of he Polish currency. Thus we se: A = { if e 0 0 oherwise D = if e 0 and { 0 oherwise wih ( ) ( ) e A D and in equaion (7) we replace β A e + β D e and esimae separaely he equaion for he appreciaion and depreciaion of he exchange rae. The resuls are reproduced in ables A and A3. If here is appreciaion of he Polish currency wih respec o he euro he correcing mechanism is very efficien: 65% of disequilibrium is eliminaed wihin one quarer. There is pricing o marke, which means ha exporers in he euro zone do no increase mark-ups, bu raher care abou fuure marke share. The effec of he insananeous pass-hrough is 0.55, bu i is esimaed wih a low T-saisic. A differen picure emerges for he depreciaion periods: Neiher pricing o marke nor error correcion mechanism seems o operae. The only facor affecing impor prices is he exchange rae. The pass-hrough effec is We could no rejec he hypohesis ha passhrough in depreciaions and appreciaions is equal. We enaively conclude herefore, ha here is no asymmery in impor prices reacion o he exchange rae. Pricing o marke manifess iself in periods of appreciaions of he domesic currency only. When exporers currency appreciaes he exporers do no end o lower heir mark-ups. Wha can be he reason for such asymmery? There are a leas hree, seemingly consisen, argumens. Firs, exporers expec appreciaion raher han depreciaion of he Polish zloy wih respec o he 9 We do reproduce he resuls of Granger causaliy here. 0 The same es is used in Herzberg e al. (003) 0