How important and asymmetric is the exchange rate pass-through to consumer prices in the Czech republic?
Résumé
In this paper, we analyse empirically the exchange rate pass-through to the
consumer price index (CPI) in the Czech Republic. Based on monthly data from 1998
onwards, our estimates yield the following main results. First, the exchange rate passthrough
appears very low or, put differently, changes in the exchange rate are by far
less than fully reflected in the CPI. Second, the exchange rate pass-through is not
asymmetric, with the CPI responding in a symmetrical manner to both appreciations
and depreciations. Consequently, in the run up to the European Monetary Union, the
Maastricht criteria of inflation and exchange rate stability appear rather disconnected
and, the effectiveness of exchange rate appreciation in lowering inflation is thus quite
low. Besides this key message for policy-making, we discuss how our results are
sensitive to the introduction – or not – of dummy variables to control for one-off factors
(e.g. increases in regulated prices), two different specifications for our variables of
interest (i.e. month-on-month changes and year-on-year changes) as well as different
time spans.