International Review of Economics and Finance

Transcription

1 Inernaional Review of Economics and Finance 19 (2010) Conens liss available a ScienceDirec Inernaional Review of Economics and Finance journal homepage: Exchange rae pass-hrough in New Member Saes and candidae counries of he EU Ramón María-Dolores Deparameno de Fundamenos del Análisis Económico, Universidad de Murcia, Campus de Espinardo 30100, Spain aricle info absrac Available online 9 March 2009 JEL classificaion: F31 F36 F42 C23 Keywords: Exchange raes Pass-hrough Moneary union Panel coinegraion This paper sudies he degree of exchange rae pass-hrough o he prices of impors of some New Member Saes (NMSs) of he European Union plus Turkey, coming from he euro area. I esimae indusry-specific raes of pass-hrough across and wihin counries using he mehodology proposed by Campa and González-Mínguez [Campa, J.M. and González- Mínguez, J.M. (2006). Differences in Exchange Rae Pass-Through in he Euro Area. European Economic Review, 50, ] which esimaes he shor- and long-run pass-hrough elasiciies. I did no find evidence eiher in favour of he hypohesis of Local Currency Pricing (zero pass-hrough) or he hypohesis of Producer Currency Pricing (complee pass-hrough) for all he counries excep for Slovenia and Cyprus. Wih reference o he resuls by indusry, he lowes values for exchange rae pass-hrough are in Manufacuring secors. However, I did observe a exchange rae pass-hrough decline hrough he pricing chain Elsevier Inc. All righs reserved. 1. Inroducion Exchange rae pass-hrough (ERPT) is commonly defined as he exen o which exchange rae changes are evenually refleced in impor prices expressed in he currency of he imporing counry. The degree of ERPT may vary considerably across he differen ypes of impors because impored goods are made up of a heerogeneous range of producs and commodiies. For insance, where he law of one price may hold one migh expec a higher degree of pass-hrough for more homogeneous and widely raded goods and commodiies such as oil or raw maerials han for highly differeniaed manufacured goods. In his paper, I sudy he ERPT of foreign o domesic prices using daa on impor uni values (IUVs) for nine differen produc caegories in some New Member Saes (NMSs) of he European Union (Cyprus, Hungary, Lavia, Poland, he Czech Republic, Slovakia, Slovenia and Romania) and one candidae counry (Turkey) from 2000 o 2006 using monhly daa. The NMSs of he European Union have made subsanial progress in ransforming heir economies since he demise of he Sovie-ype communis regimes a he sar of he 1990s. As a consequence, he perspecive of EU membership became a realiy for many counries on May 2004 (he Czech Republic, Poland, Hungary, Slovenia, Slovakia, Lavia, Esonia, Lihuania, Mala and Cyprus) or January 2007 (Romania and Bulgaria). Recenly, some of hem have also adoped he euro as currency (Slovenia, Cyprus and Mala). They have also developed srucural reforms and implemened macroeconomic sabilisaion programs wih a grea diversiy in moneary policy frameworks and exchange rae regimes. So, hese facors could affec he size of ERPT of foreign o domesic prices, which makes i imporan o sudy. In economic lieraure, he debae usually hinges on he issue of he prevalence of producer-currency pricing (PCP) versus local currency pricing (LCP) of impors. There are many economic policy issues such as pricing sraegies of foreign exporing firms, he persisence of inflaion or he impac of enering a moneary union which could influence he degree of ERPT o prices and is evoluion in differen ime horizons and secors. Likewise, hese counries have o pass an inflaion crierion as se ou in he Maasrich Treay as well as being judged by heir inflaion performances which could be influenced by he ERPT. Once hey belong Tel.: ; fax: address: ramonmar@um.es /$ see fron maer 2009 Elsevier Inc. All righs reserved. doi: /j.iref

2 24 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) o he euro area we should no forge abou he effec of differen raes of ERPT which could conribue o naional inflaion differenials and limi moneary policy of he ECB. The majoriy of empirical sudies (see, for insance, Campa & González-Mínguez, 2006; Campa, Golberg, & González-Mínguez, 2005; Frankel, Parsley, & Wei, 2005; Marazzi e al., 2005) focused on analysing he exchange rae pass-hrough response o changes in insiuional arrangemens (such as he arrival of he euro currency) and shocks in he moneary sysem (ERM crisis in 1992) in he Unied Saes, developing economies and counries inside of he euro area. 1 Campa e al. (2005) invesigaed changes in he pass-hrough o impor prices in euro area member counries based on daa going up o They deeced declines in he size of ERPT on impor prices in around wo hirds of he indusries in heir sample, alhough mos of his evidence was no saisically significan. Neverheless, hey found saisically significan effecs in manufacuring indusries. Sekine (2006) obained evidence of changes in he ERPT over ime on boh impors and consumer prices for several developed economies, including Germany, France, Ialy, UK, Japan and US. Olivei (2002) and Marazzi e al. (2005) suggesed declines in he ERPT on US impor prices. Moreover, Bussiere and Peloven (2007) repored a reducion in he ERPT o impor prices in he US and oher advanced economies. In conras o hese sudies, de Band, Banerjee, and Kozluk (2008) found evidence of he opposie in changes of he pass-hrough in some euro area counries like Ialy, Porugal and Spain and Thomas and Marquez (2006) derived less evidence of a change in he ERPT o US impor prices. Several complemenary explanaions have ried o accoun for he decline in he ERPT and cross-counry differences over ime. Among he main ones here are macro facors, suggesed by Taylor (2001) who links he decline in he ERPT o he decline in inflaion ha has been observed over he pas decades in many counries. According o his argumen, lower inflaion goes hand in hand wih lower persisence of inflaion and if cos changes are perceived o be less persisen he pass-hrough of hese shocks will be lower as well. So, a lower persisence of exchange rae shocks could have conribued o he fall of ERPT. This lower inflaion environmen is likely o be a resul of changes in moneary policy (inflaion argeing adopion) and hese changes could have conribued o he decline in he ERPT by ensuring a lower price increase and by making sure ha exchange rae flucuaions do no endanger price sabiliy. María-Dolores (2009a) finds evidence for Taylor's (2001) hypohesis using a sample of 11 NMSs of he EU plus Turkey. Anoher imporan macro facor is he naure of he faco exchange rae regime. Some auhors jusify ha a more sable exchange rae regime is indeed likely o induce more LCP and a pass-hrough decrease for impor prices. 2 More recenly, many heoreical and empirical sudies have analysed he ERPT beyond he debae of he one price law and convergence across counries. From a heoreical poin of view, anoher imporan debae has been iniiaed in favour of opimal moneary policy and exchange regimes. 3 Finally, furher poenial reasons for he decline in he ERPT could be microeconomic Facors, such as shifs in he composiion of he impor bundle from high pass-hrough goods such as energy and raw maerials o lower pass-hrough iems such as manufacured goods (see Campa & Goldberg, 2002), an increase in rade inegraion (see Gus, Leduc, & Vigfusson, 2006) or an increasing share of impors denominaed in he home currency (see Campa e al., 2005). 4 The conribuion of his paper is wofold. Firs, o my knowledge, i is he firs paper in empirical lieraure o sudy ERPT ha originaes inside he euro area aking ino consideraion a division by caegories of impor producs. 5 The second goal of his paper is o sudy he ransmission hrough he pricing chain. I use a mehodological approach proposed by Campa and González-Mínguez (2006) which esimaes he shor- and long-run pass-hrough elasiciies, where long-run elasiciies are defined as he sum of he pass-hrough coefficiens for he conemporaneous exchange rae and is firs four lags. This paper is organised as follows: in Secion 2, I describe and ake ino accoun he daa used in he empirical analysis and he poenial macro and micro facors. In Secion 3 I presen he ERPT equaion and he differen definiions of shor- and long-run exchange rae pass-hrough assumed by he empirical lieraure menioned above. In Secion 4 I offer he main resuls derived for he differen counries. In Secion 5 I analyse ERPT o he cos of inermediae consumpion and final consumpion prices. Finally, in Secion 6 I provide he main conclusions of my analysis. 2. Daa descripion and poenial macro and micro facors In his secion, I sudy he changes in he ERPT using impor prices inside he euro zone ino he NMSs and Turkey. I use ime series daa on impor uni values for nine differen produc caegories for each counry. My analysis focuses on impors inside he euro area considering ha i is he mos imporan par of he oal rade of hese counries and i is coninually exposed o exchange rae flucuaions. Is size is also very imporan as we will see laer. The daabase ha I use in his paper include monhly ime series of uni values of impors (IUVs) from euro area counries for nine produc caegories defined a he one digi SITC level of aggregaion which is exraced from Eurosa-Comex. As Campa and González-Mínguez (2006) poin ou, his daabase has he 1 Menon (1995) reviews 43 empirical papers abou exchange rae pass-hrough and indicaes ha mos of he heerogeneiy in he resuls is driven by differen esimaion echniques and differen daa coverage. 2 Seel and King (2004) consider he effec on he degree of ERPT of he exchange rae regime in operaion and check he hypohesis ha pass-hrough will be lower under a floa regime. 3 See Corsei and Preseni (2001, 2005), Obsfeld (2002), Devereux (2000), Devereux and Engel (2002) and Devereux, Engel, and Tille (2003). 4 Yang (1995) finds ha here is obvious variaion in exchange rae pass-hrough among producs, which relaes significanly o he degree of produc differeniaion using U.S. daa. 5 Ca'Zorzi, Kahn, and Sánchez (2007) examine he degree of exchange rae pass-hrough in emerging markes in Cenral and Easern Europe such as Hungary, Poland, he Czech Republic and Turkey in is sample. Darvas (2001) and Coricelli, Bosjan, and Masen (2003) cover in heir sudies exchange rae pass-hrough issue indirecly. and María-Dolores (2009b) applies he de Band e al. (2008) mehodology o 11 Cenral and Easern European counries.

3 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) Fig. 1. Impors as a percenage of GDP. advanage of focusing explicily on he produc composiion of impors ino he counry and can hus accoun for differen raes of pass-hrough among differen produc caegories for any given counry. 6 As I menioned in he Inroducion, accouning for hese divergences is imporan for any meaningful analysis of differences in pass-hrough raes across and wihin counries. As differences arise from he produc composiion of impors exposed o exchange rae flucuaions, we can also accoun for a significan amoun of aggregae differences of impor prices pass-hrough across counries. 7 Daa informaion is offered in Appendix A. Wih reference o some poenial micro facors deermining he ERPT, I could emphasize ha he inclusion of hese counries as an EU membership could have influenced he shares of differen producs subjec o exchange rae flucuaions. Fig. 1 shows, for each counry (excep Esonia and Turkey) oal impors as a percenage of GDP in 2000 and The majoriy of hem (excep Mala) have considerably increased he degree of openness alhough here is a large divergence among hem. The highes value for impors as a percenage of GDP in 2006 is in Slovakia (83.03%) and he lowes is in Poland (36.62%). Fig. 2 illusraes he impor of goods inside he euro area in 2000 and Slovenia is he counry wih he highes share of impors inside he euro area which represens 65.34% of he GDP in A he oher end, Lihuania reaches 33.09% in These resuls indicae he imporance of he rade wihin he euro area for hese counries. 8 Brissimis and Kosma (2007) indicae he imporance of he marke power in he degree of ERPT and provide empirical evidence on his relaionship. Fig. 3 shows he disribuion of euro area impors. This disribuion varies widely across differen produc caegories. Vehicles and Transpor Equipmen is he mos imporan caegory (46.43%) as a consequence of he ousourcing phenomena in Europe from wesern o cenral and easern counries, followed by Basic Manufacures (17.84%), Chemicals (11.47%) and Manufacured Goods (10.81%). Neverheless, here is a large degree of heerogeneiy. For insance, in Vehicles and Transpor Equipmen Hungary and Slovakia presen he larges values, 56.61% and 52.49%, respecively. By conras, in Slovenia his caegory is siuaed around 40%. Anoher imporan example is he Chemical secor where he highes percenage is in Poland (15.88%) and he lowes in Mala (6.42%). The less imporan secors are Beverages and Tobacco and Animal, vegeable oil and fa. There are also many poenial macro facors ha could have influenced he size of he ERPT such as he differen exchange rae regimes exising in he differen counries (crawling band, manage floa, independen floa or flexible exchange rae) and he dae of adopion of inflaion argeing in some counries. 9 In order o analyse he ERPT, here are wo essenial pars of he analysis: he nominal exchange raes and he marginal cos, or foreign price proxy. To esablish an accurae definiion of hese variables, I ake ino accoun he relevan inernaional marke for he produc. If here is possible inegraion in he world marke, here exiss only a single inernaional marke for he produc, regardless of produc origin, desinaion marke or currency denominaion. In his case measuring he world price should be he 6 de Band e al. (2008) show a risk of cavea concerning he use of IUV. 7 Campa and González-Mínguez (2006) poin ou ha impor price daa has several limiaions for he analysis of pass-hrough behavior because i is an index based on uni values raher han prices, which creaes some problems concerning he comparabiliy of goods over ime. This index is no capable of measuring eiher changes in he qualiy or for changes in relaive demand of similar goods or changes in he composiion of impors by counry of origin. 8 There are no similar available daa for Esonia and Turkey. 9 The daes of adopion of inflaion argeing for he Czech Republic, Hungary and Poland are January 1998, June 2001 and Ocober 1998, respecively. Turkey also owns an explici inflaion argeing from May 2001.

4 26 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) Fig. 2. Impor euro area 12 from oal impors. same when expressed in a common currency. I use he world price in a common currency o esablish an appropriae measure of he foreign price and he exchange rae. I also include he bilaeral exchange rae beween he currency in which he foreign price is denominaed and he home currency. When sudying his case, he world price will be expressed in euros and we will use, for a given produc, he euro price of impors coming from he euro area as our proxy for he foreign price and bilaeral exchange rae beween he domesic currency and he euro as our exchange rae measure Esimaion of exchange rae pass-hrough ino impor prices By definiion impor prices for any ype of goods j, MP j are a ransformaion of expor prices of a counry's rading parners XP j using he bilaeral exchange rae ER. 11 So, we have: MP j = ER T XP j : ð1þ Taking logs we obain: mp j = er + xp j ð2þ where he expor price consiss of he exporers marginal cos and a mark-up: XP j = FMC j T FMKUP j : ð3þ So, we obain: xp j = fmc j + fmkup j : ð4þ Subsiuing Eq. (4) ino Eq. (2) yields: mp j = er + fmc j + fmkup j : ð5þ Expression (5) offer us he hree main deerminans of he ERPT: (i) effecs of he exchange rae movemen, (ii) marginal cos effecs aribuable or no o he exchange rae movemens and (iii) mark-up responses; assuming uniy ranslaion of exchange rae movemens. Wih reference o he mark-up facor i implicily depends on he marke share of domesic producers relaive o foreign producers, as well as he form of compeiion ha exiss in he marke for he indusry and he exisence of price discriminaion. When a high ERPT is prediced: here is a large share of impors in he oal indusry supply, a high degree of price discriminaion or a large share of impored inpus in producion in he arge counry. On he oher hand, ERPT could be higher if he raio of 10 Campa and González-Mínguez (2006) perfomed J A -ess o deermine which specificaion of marke srucure (inegraed or segmened) for he euro area counries originaing ouside he area is more appropiae and hey obain ha he bes opion is he one of an inegraed marke srucure. 11 I base his secion on Campa e al. (2005) and de Band e al. (2008).

5 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) Fig. 3. Disribuion of euro area impors. exporers relaive o local compeiors is high, and lower if he exporers compee for marke share and depends on he currency denominaion of expors, srucure and imporance of inermediae goods markes. Neverheless, if exporers have marke power, hey may decide o absorb some of he exchange rae variaions insead of passing hem hrough he price in he imporing counry currency. If he PCP holds, he pass-hrough is complee and mark-up does no respond o flucuaions of exchange raes. A he oher exreme, if LCP holds, exporers may decide no o vary prices in he arge counry currency and assume flucuaions wihin he mark-up. So, mark-up in each indusry has wo componens: (i) a specific indusry componen and (ii) a reacion o exchange rae movemens: fmkup j = α j + Φer : ð6þ In regards o he marginal cos, which is a funcion of demand ha condiions he imporing counry, i is also imporan o look a he marginal coss of producion (wages) in he exporing counry and he commodiy prices denominaed in foreign currency: fmc j = η 0 y + η 1 fw + η 2 er + η 3 fcp + e ð7þ where y is he income in he imporing counry, fw is he wage and fcp is he commodiy price index in foreign currency. Subsiuing Eqs. (7) and (6) ino Eq. (5), we derive: mp j = α j + ð1 +Φ + η 2 Þ er fflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflffl} + η 0 y + η 1 fw + η 3 fcp + ε fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl} : ð8þ β γfp This equaion can be wrien as: mp j = α j + βer + γfp + e ð9þ where β capures he pass-hrough elasiciy and η 0 y +η 1 fw +η 3 fcp is considered independen of he exchange rae and is refleced in he world price of he produc, fp, in he world currency. Likewise, i also gives us a long-run relaionship beween he impor price, and he exchange rae and a measure of he foreign price. Campa and González-Mínguez (2006) indicae ha each of hese series in Eq. (9) used o be considered by a uni roo alhough some auhors are no able o rejec he null hypohesis of he non-exisence of a coinegraing relaionship among he hree series and proceed by esimaing he previous equaion in firs differences: Δmp j = α j + X4 k =0 b k Δer k + X4 k =0 c k Δfp k + ε for a cerain ype of good i in a cerain counry j. The coefficien b 0 offers us he shor-run ERPT and hey propose he sum of coefficiens P4 b k as he long-run ERPT. k =0

6 28 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) They allow he possibiliy of parial adjusmen of he rule seing impor prices wih a flexible form and his adjusmen pah could vary by indusry according o he macro and micro facors menioned above 12 and hey focus on esing LCP (zero passhrough) and PCP (complee pass-hrough) hypohesis in he shor- and long-run Empirical resuls In his secion, I offer he main resuls for he esimaed ERPT in some NMSs and Turkey using he mehodological approach indicaed in he previous secion. I finally analyse ERPT in he Czech Republic, Poland, Hungary, Lavia, Slovakia, Slovenia, Cyprus, Romania and Turkey. I drop Esonia, Mala, Lihuania and Bulgaria ou of he sample because bilaeral exchange rae variaions were null during he majoriy of he sample period. There are a number of reasons why I expec ha here migh be a change in he long-run ERPT wihin our sample period. For insance, on May, 2004, en NMSs enered he EU. This supposed imporan changes in hese economies. If I do simple ADF ess for coinegraion in ime series for individual counry/indusry combinaions we obain a rejecion of he null of no coinegraion for over 11% of he series (a 5% level). Aferwards, I check for a long-run relaionship beween impor prices, exchange raes and foreign prices. For ha purpose, I perform Engle and Granger (1987) ess and find evidence ha here is a long-run relaionship in levels beween hese variables. 14 In spie of he previous resul, a good approximaion is o esimae Eq. (9) by ordinary leas squares (OLS) and esimae he shor- and long-run pass-hrough elasiciies for he differen counries and indusries using a dummy for NMSs counries which conemplaes differen srucural breaks in ime series. Then, I define long-run elasiciies as he sum of he pass-hrough coefficiens for he conemporaneous exchange rae and is firs four lags following Campa and González-Mínguez (2006). In order o deermine daes of srucural breaks I use wo alernaive versions of Eq. (9): (i) a break in he consan and (ii) a break in all he coinegraing equaion coefficiens. mp j = ˆα + ˆα 1 d s + ˆβer + ˆγfp + e mp j = ˆα + ˆα 1 d s + ˆβer + ˆβ 1 er d s + ˆγfp + ˆγ 1 fp d s + υ ð10þ ð11þ where d s is a dummy variable equal o 0 if bs and equal o 1 oherwise. I use he Quand Andrews unknown breakpoin es o derive daes for breaks in boh ypes of specificaion. I should expec he coefficien of he mark-up, α, o decrease due o he inegraion of he counries in EU or an increase in he expecaions of belonging in he near fuure. Table 2 indicaes ha in he specificaion of break only in a consan he fixed componen in he mark-up end o rise more han decrease (23 ou 76 significan series are negaive, 30%). Neverheless, he specificaion in Eq. (10) is much more resricive han he one based in Eq. (11). In his case 8 ou 32 of he significan series are negaive (25%). 15 I also did an ADF es for individual counry/indusry combinaions considering boh specificaions and I found ha he rejecion of he null of no coinegraion was only possible for 1 ou 78 series in he wo versions of he model. Table 1 offers us esimaed direcions, significances and daes for breaks. I show he specificaion of breaks in he enire coinegraing vecor and wheher he change is posiive or negaive and is significance. Some of hem are very close o he dae of enering o EU (SIT_2 in Poland and SIT_0 and SIT_2 in Slovenia), inflaion argeing (SIT_6 in Hungary and SIT_5 and SIT_7 in Turkey) or a change in he exchange rae sysem (SIT_2 in Slovakia). Once I have derived he differen srucural breaks in our ime series I esimae by OLS. In some indusries, I include a correcion for firs-order auocorrelaion because here are many residual auocorrelaion. These esimaed elasiciies are available upon reques. Table 2 repors he esimaed shor- and long-run elasiciies wih he resricion ha ERPT is he same and imposed for all indusries wihin a given counry. Table 3 repors a summary of saisics of hese esimaed shor- and long-run ERPT for he differen indusries wihin a counry. As we can see ERPT is incomplee in he shor-run for all he counries excep Cyprus (where he elasiciy is greaer han one), Lavia (nex o one) and Slovenia (equal o one). The hypohesis of LCP (zero pass-hrough) canno be rejeced for all he counries and he hypohesis of PCP (complee pass-hrough) is clearly rejeced for all he counries bu Slovenia and Cyprus. The shor-run elasiciies are larger for Cyprus, Slovenia and Lavia and smaller for Turkey, Romania, Poland, Czech Republic and Hungary. In he long-run ERPT is slighly smaller and again he larges values are in Cyprus, Lavia and Slovenia and he smalles in Turkey, Romania, Poland and Czech Republic Campa and González-Mínguez also esimae he model considering he firs lag of he dependen variable as explanaory variable alhough heir main resuls remain. 13 Al-Abri and Goodwin (2009) re-examine he exchange rae pass-hrough ino impor prices using non-linear hreshold coinegraion esimaion echnique. Banik and Biswas (2007) apply a coinegraion approach for analysing exchange rae pass-hrough in he U.S. auomobile marke. 14 I do no apply he Johansen (1988) coinegraion mehodology because he Engle and Granger (1987) echnique is enough o check ha he residuals of he regression are saionary and, herefore, he OLS esimaion and inference are valid using he variables in levels. The resuls are no offered o save space bu hey are available upon reques. 15 The specificaion from Eq. (10) is much more resricive han he one based on Eq. (11), no allowing for a possible break in he oher variables causing he esimae of α 1 o be biased. 16 Appendix II offers us pass-hrough elasiciies in he shor- and long-run. Following he suggesion by one referee I also include a medium-erm elasiciy o analyse he robusness of empirical resuls. This medium-erm elasiciy is defined as he sum of he pass-hrough coefficiens for he conemporaneous exchange rae and is firs wo lags. The resuls are very similar o he derived for he long-run case.

7 Table 1 Direcions, significance and daes for breaks. CZ LV CY PL HU SL SK RU TK Indusry (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) SITC_0 1/03, 1/02, 7/04, 9/02,+ 9/05,+ 6/03, 5/01,+ 6/04,+ 5/04, 5/04,+ 11/02,+ 9/05,+ 5/04,+ 5/04+ SITC_1 6/04, 4/01,+ 2/03,+ 1/02,+ 7/05,+ 7/05 4/05,+ 5/05, 1/02,+ 4/04+ 1/04,+ 1/04+ 5/02, 5/02 SITC_2 5/05, 5/05, 12/04,+ 12/05,+ 3/01,+ 4/06 5/01,+ 5/01 2/01+ 5/01,+ 5/04, 6/04, 9/01,+ 1/02, 5/01,+ 3/01+ 7/02, 3/06+ SITC_3 4/04,+ 4/04, 11/05, 5/05,+ 5/05 4/04,+ 3/04,+ 1/02, 1/02,+ 9/01,+ 11/01,+ 11/05, 3/01 10/04,+ 10/04+ SITC_4 5/05, 1/05+ 10/02,+ 2/06+ 12/03 12/03+ 8/05, 11/04, 4/01,+ 8/05,+ 9/03,+ 4/06, SITC_5 10/04,+ 10/04 10/04,+ 6/03,+ 2/01, 7/01, 9/01, 2/01,+ 3/01, 3/01 10/04,+ 10/04 5/03, 5/03+ SITC_6 9/04,+ 6/03, 1/02, 1/02,+ 6/05, 9/04,+ 10/01,+ 4/06,+ 10/04,+ 10/04+ 6/04, 12/01,+ 8/04,+ 8/04+ 9/04,+ 3/06,+ 4/04,+ 4/04,+ SITC_7 8/03,+ 8/03 12/04,+ 5/04, 9/04,+ 9/04+ 6/03+ 8/01, 9/05,+ 4/05, 1/04,+ 1/05+ 2/03, 6/01,+ SITC_8 9/03,+ 10/03 7/05,+ 5/02,+ 3/04,+ 5/01 5/04,+ 5/04,+ 5/05,+ 4/03+ 5/05,+ 5/05 11/01, (1) represens he specificaion of break in consan and (2) he specificaion of break in he enire coinegraing vecor and indicae wheher i is significan a 5%. R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010)

8 30 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) Table 2 Differences in ERPT raes by counry. Counry S/R PT L/R PT Czech Republic Cyprus Lavia Hungary Poland Slovakia Romania Turkey Slovenia Average Source: Eurosa and own calculaions., I can be saisically rejeced ha he pass-hrough is zero/one. S/R PT ~ shor-run pass-hrough and L/R PT ~ long-run pass-hrough. Table 3 Percenage of oal indusries for which he esed hypohesis can be rejeced. Counry S/R S/R L/R L/R PT=0 PT=1 PT=0 PT=1 Czech Republic Cyprus Lavia Hungary Poland Slovakia Romania Turkey Slovenia S/R ~ shor-run, L/R ~ long-run and PT ~ pass-hrough. How can we inerpre hese resuls? Firs, hree of he counries wih he smalles pass-hrough, he Czech Republic, Poland and Turkey have adoped inflaion argeing in heir moneary policies and own a flexible exchange rae sysem. This gives evidence and suppors Taylor's (2001) hypohesis. Second, we expec a posiive relaionship beween openness and he esimaed long-run ERPT. This resul is derived for Slovenia and Hungary bu no Cyprus where we should expec a smaller long-run ERPT. Third, if we examine he indusry composiion in Cyprus we can see how he Mineral Fuels indusry is essenial in relaion o oher counries (5,95%). The imporance of he Mineral Fuels indusry can explain he anomalous resul derived in his counry. Wih reference o he resuls by indusry, Tables 4 and 5 evaluae he elasiciies by ype of producs. I esimae he ERPT by imposing he resricion ha hey are equal for a given indusry across he nine counries in he sample. Elasiciies vary from for Basic Manufacures o o Animal, vegeable oil and fa in he shor-run. In his case, ERPT ends o be more complee in he long-run in some indusries like Mineral Fuels and Food and Live Animals. According o heory, we can see how elasiciies are lower in Basic Manufacures, Chemicals and Manufacured Goods. Anoher quesion of considerable ineres ha needs o be reaed is he equaliy of pass-hrough elasiciies across counries for a given indusry and wihin a counry for he differen indusries. This analysis allows us o examine wheher inernaional price discriminaion exiss. There is an imporan debae in economic lieraure abou his opic. Goldberg and Kneer (1997) conclude ha ERPT is indusry-specific and consan for a given indusry across counries and Campa and Goldberg (2002) add ha ERPT has also been sable in ime. These auhors conclude ha ERPT variaions are due o changes in he produc composiion of impors. For ha reason a good procedure is o perform ess for he equaliy of pass-hrough raes across counries and indusries (see Table 6). I observe ha ERPT in he shor-run is equal for all indusries wihin a given counry bu no in Slovakia. Neverheless, in he longrun I accep ha ERPT is equal for all indusries wihin a given counry. Finally, ERPT in he shor-run is equal for all counries wihin a given indusry excep for Beverages and Tobacco in he shor-run. This resul could be due o differen axaion policies applied in each counry. 5. Exchange rae pass-hrough o he cos of inermediae consumpion and final consumpion prices Some empirical resuls and heoreical models sugges a decline in he ERPT along he pricing chain. Therefore, a sronger and quicker ERPT is expeced for IUVs, followed by producer prices and finally by Harmonized Consumer Prices Indexes. 17 Nex, I proceed o examine wha is he ERPT of exchange rae movemens ino he aggregae consumer price index of a counry (final consumpion impored goods) and wha is he pass-hrough ino he overall cos of producion (impored inpus). By examining he impac of exchange rae movemens ino he aggregae consumer price index of a counry and ino he overall cos producion, 17 Hahn (2003) obains evidence of ERPT decline along he pricing chain for euro area.

9 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) Table 4 Differences in ERPT raes by indusry. Indusry S/R PT L/R PT 0. Food and Live Animals Beverages and Tobacco Crude Maerials Mineral Fuels 0.464, Animal, vegeable oil and fa 0.558, Chemicals Basic Manufacures Vehicles and Transpor Equipmen Manufacured Goods Average Source: Eurosa and own calculaions., I can be saisically rejeced ha he pass-hrough is zero/one. S/R PT ~ shor-run pass-hrough and L/R PT ~ long-run pass-hrough. Table 5 Percenage of oal counries for which he esed hypohesis can be rejeced. Indusry S/R S/R L/R L/R PT=0 PT=1 PT=0 PT=1 0. Food and Live Animals Beverages and Tobacco Crude Maerials Mineral Fuels Animal, vegeable oil and fa Chemicals Basic Manufacures Vehicles and Transpor Equipmen Manufacured Goods S/R ~ shor-run, L/R ~ long-run and PT ~ pass-hrough. we can evaluae respecively he ERPT o goods impored for final consumpion or impored inpus. As Campa and González- Mínguez (2006) poin ou, an approximaion o he aggregaed ransmission of he exchange rae movemens o he overall coss of producion and o consumer prices can be compued hrough a weighed aggregaion of he pass-hrough raes obained for he impor prices of each ype of produc. I ake as a saring poin he previous evidence ha, in he long-run, ERPT is similar across indusries of a given counry and across counries for a given indusry, implying he differenial ERPT raes across counries are no likely o be grea due o differences in indusry composiion. From ha objecive I follow Campa and González-Mínguez (2006) by considering a price index for counry i as he resul of wo successive decomposiions. 18 The firs decomposiion allow us o express he price index as a weighed average of he differen producs enering he index: PI = Y j p i; j w i; j where w i,j is he weigh of he produc caegory j in he aggregae index of counry i. So, I can disaggregae he componen referring o each produc caegory ino hree componens, which are defined according o he geographical origin of he producs. PI i = Y p jd i; jd w i; jd Y p jn i; jn w i; jn Y p je i; je w i; je where jd, jn and je indicae he shares of is final or inermediae consumpion which are saisfied by producs produced domesically, in oher non-euro area counries and in euro area counries, respecively. Taking firs differences of he logs of ha expression and assuming ha he weighs are consan over ime we obain ha: ˆP i = X jd i; jd w i; jd ˆp + X jn i; jn w i; jn ˆp + X je w i;je i; je ˆp where P is he inflaion. 18 Campa and González-Mínguez (2006) indicae ha an approximaion o he aggregaed ransmission of exchange rae movemens o overall coss of producion and o consumer prices can be compued hrough a weighed aggregaion of he pass-hrough raes obained for he impor prices of each ype of produc.

10 32 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) Table 6 Tes of he equaliy of shor- and long-run pass-hrough esimaes (p-values). Across counries S/R L/R Counry Czech Republic Cyprus Lavia Hungary Poland Slovakia a Romania Turkey Slovenia Indusry 0. Food and Live Animals Beverages and Tobacco a Crude Maerials Mineral Fuels Animal, vegeable oil and fa Chemicals Basic Manufacures Vehicles and Transpor Equipmen Manufacured Goods a I can be saisically rejeced ha he pass-hrough is equal o he res a 5% significance level. The previous equaion shows ha he effec on aggregae prices can be decomposed in he sum of hese hree componens. I usually consider in previous secions ha he ERPT examines he las erm of he righ-hand side of he equaion by assuming he oher wo erms are zero. By esimaing Eq. (10) I am considering ha ERPT o price of goods produced domesically or non-euro area counries is zero. This erm capures he direc effec arising from he pass-hrough o he prices of producs impored from he euro area. For each produc caegory his effec can be decomposed in wo pars: he weigh of impored producs inside he euro area in he price index, w i,je (i.e. he openness of he counry when aggregaing across producs), and he rae of pass-hrough from exchange raes ino impor prices. Therefore, I expec ha he higher he weigh of euro area impored goods in he price index he higher will be he impac of any rae of pass-hrough from exchange raes ino impor prices in he aggregaed price index. The share of impors from euro area wihin oal impors is very high in all hese counries and i could be obained using boh he inpu oupu ables for each counry and he Comex daabase. In he case of inermediae consumpion he inpu oupu able would indicae for every indusry in each counry he decomposiion of inermediae consumpions beween hose which are domesically produced and hose ha are impored. In a similar way, in he case of consumpion goods, he able would show which par of he demand for each produc is saisfied hrough domesic producion and impors. Obviously, hese ables have a produc disaggregaion much larger and i would be necessary o mach hem in our nine caegories. Neverheless, we have several resricions. Firs, among impored producs, wha he ables do no show is he decomposiion according o he euro area origin (only inra European Union and exra European Union). Second, we only have deailed daa according o ha origin for Poland and Slovenia in our sample. For ha reason i is necessary o use he Comex daabase since i offers he share of impors coming inside Table 7 Pass-hrough raes o cos of inermediae consumpion (for a 10% depreciaion) es of equaliy agains he average. Counry PT value F-es agains he unweighed average A. Under own degree of openness Czech Republic Cyprus Hungary Poland Slovakia Slovenia Average 0.37 B. Under he average degree of openness Czech Republic Cyprus Hungary Poland Slovakia Slovenia Average 0.37, indicae he null hypohesis canno be rejeced a 95% and 90% significance level, respecively.

11 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) Table 8 Pass-hrough raes o final consumpion prices (for a 10% depreciaion): es of equaliy agains he average. Counry PT value F-es agains he unweighed average A. Under own degree of openness Czech Republic Cyprus Lavia Hungary Poland Slovakia Slovenia Average 0.34 B. Under he average degree of openness Czech Republic Cyprus Lavia Hungary Poland Slovakia Slovenia Average 0.22, indicae he null hypohesis canno be rejeced a 95% and 90% significance level, respecively. he euro area wihin oal impors. Finally, given he lack of deailed informaion, we needed o make he assumpion ha, for each good enering he producion process as inermediae consumpions, he share of impors originaed inside he area wihin oal impors is he same for all he indusries producing final goods The main hypohesis is made when he produc is final insead of inermediae consumpion. Nex, I did he decomposiion of he price index of he producs used as inermediae inpus in he producion process and he consumer price index. I exclude Turkey and Romania from he exercise of he consumer price index plus Lavia from he cos of inermediaion exercise because here is no enough daa available. Tables 7 and 8 offer us he main resuls of he impac of a 10% depreciaion of he exchange rae of he euro. Divergences in ERPT can be due o wo sources: (i) differences in he degree of openness of member counries and (ii) for a given degree of openness, differences in he produc composiion of impors can also resul in differences in ERPT and if produc-specific ERPT raes vary a lo in relaion o he indusry. In order o examine his effec, I esimae ERPT by considering he own degree of openness and by imposing he same degree of openness (average) in all counries. Table 7 shows he esimaed ERPT o he cos of inermediae consumpion. The firs par corresponds o he aggregaed raes calculaed for each counry under is own degree of exposure o euro area impors. In his observed case, differences can be due o heerogeneiy in he degree of openness and/or he indusry composiion of rade. In he second par, he degree of rade openness is average and he remaining differences are solely due o he heerogeneiy in he srucure of heir impors of inpus. The highes ERPT are obained in Slovenia and Hungary. By conras Cyprus, Poland and Slovakia have he lowes. In he second par of Table 7 we can see how differences remain and he range is beween 0.11 and The average ERPT is smaller (0.371) han he derived for he long-run using impor prices (0.631). Table 8 includes he ERPT o consumer price indices on he face of a 10% depreciaion of he euro. The highes raes are offered again by Hungary, Slovakia, Slovenia and Lavia. If we observe he pricing chain we find evidence in favour of a decline in he ERPT because he average is slighly smaller (0.34) han he derived for ERPT o consumer prices (0.37). For insance, in he Czech Republic long-run ERPT o UIVs ranges is 0.24, ERPT o cos of inermediaion is 0.17 and o final consumpion is Using he same srucural breaks han in he previous secion I also find evidence of an ERPT decline for cos of inermediaion and final consumpion goods. 19 Finally, I observe o wha exen he calculaed differences in oal ERPT are significan by doing an equaliy es of calculaed ERPT agains heir unweighed averages. I mus poin ou ha esing agains he unweighed average has he poenial disadvanage ha, in he case ha a small counry would have a oal pass-hrough rae which is much differen from he ohers, he unweighed average would end o be biased owards he pass-hrough value for ha counry. Therefore, he equaliy of oal raes o heir average would end o be rejeced for he oher counries. While in fac, apar from he oulier, i could be clusered around a small range of values. For he cos of inermediae consumpion he equaliy of ERPT o average is saisically rejeced for Slovenia. In he case of final consumpion his hypohesis is rejeced for Poland, Slovenia and Lavia. 20 If we look carefully a he resuls under own degree of openness and under he average degree of openness for cos of inermediae inpus, I verify ha he large dependence of heir economies o impored inpus (openness) is no a relevan facor o explain size of he ERPT o he cos of inermediaion. For final consumpion we obain differen resuls and he amoun of impored goods seems o be more relevan. 19 These resuls are no offered for he sake of breviy. 20 I repea he same es using weighed averages by he relaive size of each counry's GDP bu he main resuls remain.

12 34 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) Conclusions In his paper, I have sudied he ERPT changes ino he prices of impors of some New Member Saes (NMSs) of he European Union and one candidae counry, Turkey, coming from he res of he euro area. I have used daa on impor uni values for nine differen produc caegories for each counry and I have esimaed indusry-specific raes of pass-hrough across and wihin counries using he mehodological approach by Campa and González-Mínguez (2006) which esimaes he shor- and long-run pass-hrough elasiciies, where long-run elasiciies are defined as he sum of he pass-hrough coefficiens for he conemporaneous exchange rae and is firs four lags. By applying his mehodology, I observe ha he hypohesis of LCP (zero pass-hrough) canno be rejeced for all he counries and he hypohesis of PCP (complee pass-hrough) is clearly rejeced for all he counries bu Slovenia and Cyprus in he shor-run. The shor-run elasiciies are larger for Cyprus, Slovenia and Lavia and smaller for Turkey, Romania, Poland, he Czech Republic and Hungary. In he long-run ERPT is slighly smaller and again he larges values are in Cyprus, Lavia and Slovenia and he smalles in Turkey, Romania, Poland and he Czech Republic. When examining differen European counries, firs, I find ha he Czech Republic, Poland and Turkey have he smalles passhrough and hey have adoped inflaion argeing in heir moneary policies and have a flexible exchange rae sysem. This could give suppor and evidence in favour of Taylor's (2001) hypohesis. Second, he expeced posiive relaionship beween openness and he esimaed long-run ERPT is derived for Slovenia and Hungary bu no for Cyprus where we should expec a smaller longrun ERPT. Wih reference o heory and he resuls by indusry, we can see how elasiciies are lower in Basic Manufacures, Chemicals and Manufacured Goods. Finally, I observe he main resuls o he impac of a 10% depreciaion of he exchange rae of he euro o he cos of inermediaion consumpion and o final consumpion prices considering ha divergences in ERPT can be due o wo sources:(i) differences in he degree of openness of member counries and (ii) for a given degree of openness, differences in he produc composiion of impors. The highes ERPT o he cos of inermediaion consumpion is obained in Slovenia and Hungary. In conras Cyprus, Poland and Slovakia have he lowes. The highes raes of ERPT o consumer prices are offered again by Hungary, Slovakia, Slovenia and Lavia. As far as ERPT along chain is concerned I find evidence in favour of a decline in he ERPT along he pricing chain. We observe a large dependence of heir economies on impored inpus (openness) which is a relevan facor o explain size of he ERPT for final consumpion. My furher research should be cenered on analysing he exchange rae pass-hrough by using alernaive mehodologies. For insance, Den Haan (2000) suggesed a procedure for analysing he comovemen beween oupu and prices based on he correlaions of he corresponding VAR forecas errors a alernaive forecas horizons which could be easily applied in his conex. Anoher ineresing opic is o sudy more direcly he role played by hose micro and macro facors poined ou in Secion 2 and aking ino accoun oher facors like disribuion coss, ransporaion charges and axes and margin of disribuors. Finally, I would also ry o explain he observed degree of pass-hrough and o sudy is srucural deerminans hrough a small open economy DSGE model feauring a number of characerisics ha are likely o influence he response of domesic prices o changes in exchange raes and esimaing a VAR for each counry. Acknowledgemens This paper was prepared while he auhor was visiing Bank of Spain. I am graeful o Jose Manuel Campa, José García Solanes, Jose Manuel González-Mínguez and seminar paricipans a he Bank of Spain and UAM for heir useful commens. Financial suppor from Miniserio de Ciencia y Tecnología hrough projec SEJ C03-02 is graefully acknowledged. Appendix A. Daa Impor prices The daa are monhly uni value indices of impors from euro area counries of eigh produc caegories for welve counries (Czech Republic, Cyprus, Lavia, Lihuania, Hungary, Mala, Poland, Slovak Republic, Bulgaria, Romania, Esonia and Turkey) from 2000:01 o 2007:06 exraced from COMEXT (eurosa). The daa is no seasonally adjused. I have used producs a he 1-digi SITC level. The lis of producs is: 0: Food and Live Animals, 1: Beverages and Tobacco, 2: Crude Maerials, 3: Mineral Fuels, 4: Animal, vegeable oil, fa, 5: Chemicals, 6: Basic Manufacures, 7: Vehicles and Transpor Equipmen and 8: Manufacured Goods. Exchange raes I consider he monhly exchange rae indices (period averages) expressed in unis of domesic currency per uni of foreign currency from COMEXT (eurosa). Foreign price index I use a monhly series of he world price of he produc caegory from COMEX (eurosa). This world price is he price of he uni value index of impors of ha produc caegory coming from he euro area.

13 R. María-Dolores / Inernaional Review of Economics and Finance 19 (2010) References Al-Abri, A., & Goodwin, B. K. (2009, January). Re-examining he exchange rae pass-hrough ino impor prices using non-linear esimaion echniques: Threshold coinegraion. Inernaional Review of Economics & Finance, 18(1), Banik, N., & Biswas, B. (2007). Exchange rae pass-hrough in he U.S. auomobile marke: A coinegraion approach. Inernaional Review of Economics & Finance, 16(2), Brissimis, S. N., & Kosma, T. S. (2007). Marke power and exchange rae pass-hrough. Inernaional Review of Economics & Finance, 16(2), Bussiere, M. & Peloven, T. (2007). Expor and impor prices in emerging markes: Wha role for exchange rae pass-hrough? mimeo, European Cenral Bank. Campa, J.M. & Goldberg, L.S. (2002). Exchange rae pass-hrough ino impor prices: A macro or micro phenomenon? NBER Working Papers 8934, Naional Bureau of Economic Research. Campa, J.M., Golberg, L. & González-Mínguez, J.M. (2005). Exchange rae pass-hrough o impor prices in he euro area, NBER working paper Campa, J. M., & González-Mínguez, J. M. (2006). Differences in exchange rae pass-hrough in he euro area. European Economic Review, 50, Ca'Zorzi, M., Kahn, E. & Sánchez, M. (2007). Exchange rae pass-hrough in emerging markes ECB Working Papers Series 739. Coricelli, F., Bosjan, J. & Masen, I. (2003). Exchange rae pass-hrough in candidae counries. Cener for Economic Policy Research Discussion Paper No Corsei, G., & Preseni, P. (2001). Welfare and macroeconomic inerdependence. Quarerly Journal Economics, 116(2), Corsei, G., & Preseni, P. (2005). Inernaional dimensions of opimal moneary policy. Journal of Moneary Economics, 52, de Band, O., Banerjee, A. & Kozluk, T. (2008). Measuring long run exchange rae pass-hrough, economics The open-access, open-assessmen E-Journal, 2(6). Darvas, Z. (2001). Exchange rae pass-hough and real exchange rae in EU Candidae Counries, Deusche Bundesbank Discussion Paper No Den Haan, W. J. (2000). The comovemen beween oupu and prices. Journal of Moneary Economics, 46, Devereux, M. (2000). Moneary policy, exchange rae flexibiliy and exchange rae pass-hrough. Revisiing he case for flexible exchange raes (pp ).Bank of Canada. Devereux, M., & Engel, C. (2002). Exchange rae pass-hrough, exchange rae volailiy, and exchange rae disconnec. Journal of Moneary Economics, 49, Devereux, M., Engel, C., & Tille, C. (2003). Exchange rae pass-hrough and he welfare effecs of he euro. Inernaional Economic Review, 44, Engle, R., & Granger, C. (1987). Coinegraion and error correcion: represenaion, esimaion and esing. Economerica, 55, Frankel, J., Parsley, D. & Wei, S. (2005). Slow pass-hrough around he world: A new impor for developing counries? NBER Working Paper Goldberg, P., & Kneer, M. M. (1997, Sepember). Goods prices and exchange raes: Wha have we learned? Journal of Economic Lieraure, American Economic Associaion, 35(3), Gus, C., Leduc, S. & Vigfusson, R.J. (2006). Trade Inegraion, compeiion, and he decline in exchange rae pass-hrough. Inernaional Finance Discussion Paper No.864, Augus 2006, Federal Reserve Board. Hahn, E. (2003). Pass-hrough of exernal shocks o euro area inflaion, ECB Working Paper No Johansen, S. (1988). Saisical analysis of coinegraing vecors. Journal of Economic Dynamics and Conrol, 12, Marazzi, M., Shees, N., Vigfusson, R., Faus, J., Gagnon, J., Marquez, J., e al. (2005). Exchange rae pass-hrough o U.S. impor prices: Some new evidence, The Federal Reserve Board Inernaional Finance Discussion Papers María-Dolores, R. (2009a). Exchange rae pass-hrough in cenral and easern counries: Do inflaion and openness maer? forhcoming in Easern European Economies. María-Dolores, R. (2009b). Has exchange rae pass-hrough changed in New Member Saes of he EU afer is membership? mimeo. Menon, J. (1995). Exchange-rae pass-hrough. Journal of Economic Surveys, 9, Obsfeld, M. (2002). Inflaion argeing, exchange rae pass-hrough and volailiy. American Economic Review, Papers and Proceedings, 92, Olivei, G. (2002). Exchange raes and he prices of manufacuring producs impored ino he Unied Saes. New England Economic Review, Firs quarer, Federal Reserve Bank of Boson (pp. 3 8). Sekine, T. (2006). Time-varying exchange rae pass-hrough: Experiences of some indusrial counries, BIS Working Papers No.202, Bank of Inernaional Selemens. Seel, D., & King, A. (2004). Exchange rae pass-hrough: The role of regime changes. Inernaion Review of Applied Economics, 18(3), Taylor, J. B. (2001). Low inflaion, pass-hrough, and he pricing power of firms. European Economic Review, 44(7), Thomas, C.P. & Marquez, J. (2006). Measuremen maers for modelling U.S. impor prices. Inernaional Finance Discussion Papers, No.883, Board of Governors of he Federal Reserve Sysem. Yang, J. (1995). Exchange rae pass-hrough in he U.S. marke: A cross-counry and cross-produc invesigaion. Inernaional Review of Economics & Finance, 4(4),