Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2
Pass-Through of Exchange Rate Shocks to Prices in the
Euro Area: Evidence from Pricing Chain Model
Nidhaleddine Ben Cheikh and Waël Louhichi
The objective of our study is twofold: On one hand, we seek to remedy some of the
shortcoming of the previous studies, by taking into account the non-stationarity and
the endogeneity of the variables within a VECM framework. On the other hand, in the
spirit of McCarthy (2007), we propose a VECM model that permits to track passthrough from exchange rate fluctuations to each stage of the distribution chain. The
methodology of McCarthy (2007) is applied here with some modifications. After
considering the long-run proprieties of the data, a measure of foreign costs is included
in the system as an exogenous variable which is considered as a primary variables
throughout ERPT literature. We pretend that the introduction of this variable provide a
more accurate estimates of pass-through. After estimating our VECM pricing model,
several analytical tools are used to explore the impact of exchange rate shocks: first,
impulse responses are computed to analyze the size and speed of the pass-through
of external shocks along the distribution chain; second, variance decompositions are
provided to capture the relative importance of external shocks in explaining
fluctuations in the different price indices; next, the existence of a decline in the
response of consumer prices is checked; and finally, historical decompositions are
used to assess how the external factors - exchange rate and import prices shocks have contributed to the consumer inflation in the pre- and post-EMU episodes.
____________________________________________
Nidhaleddine Ben Cheikh and Waël Louhichi, ESSCA School of Management, France,
nidhaleddine.bencheikh@essca.fr, wael.louhichi@essca.fr,