Open Economies Review

, Volume 26, Issue 5, pp 893–909 | Cite as

The Endogeneity of Exchange Rate Pass-Through: Some European Evidence

  • Ayako Saiki
Research Article


The decline in exchange rate pass-through (ERPT) in the last three decades is well-documented in the literature. Various studies seek explanations, among which is higher monetary policy credibility. ERPT is often treated as exogenous (i.e., fix coefficient) in policy-makers’ and market participants’ forecasting models. However, if the ERPT is endogenous to monetary policy, it can lead to an error in inflation forecasts and inaccurate policy reaction. Against this backdrop, this paper seeks to examine the endogeneity of exchange rate pass-through to monetary policy, using the European countries as the sample.


Monetary policy Inflation Exchange rate Pass-through GMM 

JEL Classification

E52 E31 F31 F41 C23 C26 


  1. An L, Wang J (2011) Exchange rate pass-through: evidence based on vector autoregression with sign restrictions. Open Econ Rev 23(2):359–380CrossRefGoogle Scholar
  2. Andrews D, Ploberger W (1994) Optimal tests when a nuisance parameter is present only under the alternative. Econom, Econom Soc 62(6):1383–1414CrossRefGoogle Scholar
  3. Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297CrossRefGoogle Scholar
  4. Bailliu J, Fujii E (2004) The exchange rate pass-through and inflation environment in industrialized nations: an empirical investigation. Bank of Canada Working Paper, 2004–21Google Scholar
  5. Bernanke B (2004) Remarks by Governor Ben S. Bernanke, at the meeting of the Eastern Economic Association, Washington, DC. February, 20, 2004. <> (retrieved on February 9th, 2015)
  6. Boug P, Cappelen A, Eika T (2013) Exchange rate pass-through in a small open economy: the importance of the distribution sector. Open Econ Rev 24(5):853–879CrossRefGoogle Scholar
  7. Campa J, Goldberg L (2002) Exchange rate pass-through into import prices: a macro or micro phenomenon? NBER Working paper, w8934Google Scholar
  8. Card D, Krueger A (1994) Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania. Am Econ Rev 84(4):772–793Google Scholar
  9. Choudhri E, Hakura D (2001) Exchange rate pass-through to domestic prices: does the inflationary environment matter? IMF Working Paper, WP/01/194Google Scholar
  10. Corsetti G, Pesenti P (2002) Self-validating optimum currency areas. CEPR Discussion Papers, 3220Google Scholar
  11. De Haan J, Eijffinger S, Waller S (2005) The European Central Bank: credibility, transparency, and centralization. CES Info Book SeriesGoogle Scholar
  12. De Hoyos R, Sarafidis V (2006) Testing for cross-sectional dependence in panel-data models. Stata J 6(4):482–496Google Scholar
  13. Devereux M, Engel C, Storgaard P (2003) Endogenous exchange rate pass-through when nominal prices are set in advance. J Int Econ 63:263–291CrossRefGoogle Scholar
  14. Eberhardt M, Teal F (2008) Modeling technology and technological change in manufacturing: how do countries differ? MPRA Paper 10690. University Library of Munich, GermanyGoogle Scholar
  15. Faber R, Stokman A (2009) A short history of price level convergence in Europe. J Money Credit Bank 41(2–3):461–477CrossRefGoogle Scholar
  16. Feenstra R, Gagnon J, Knetter M (1996) Market share and exchange rate pass-through in world automobile trade. J Int Econ 45:358–374Google Scholar
  17. Frankel J, Parsley D, Wei S (2004) Slow pass-through around the world: a new import for developing countries? NBER Summer Institute, 2005Google Scholar
  18. Gagnon J, Ihrig J (2001) Monetary policy and exchange rate pass-through. FRB Discussion paper. No.704Google Scholar
  19. Goldberg L, Tille C (2009) Micro, macro, and strategic forces in international trade Invoicing. NBER Working Paper 15470Google Scholar
  20. Gust C, Leduc S, Vigfusson R (2010) Trade integration, competition, and the decline in exchange-rate pass-through. J Monet Econ, Elsevier 57(3):309–324CrossRefGoogle Scholar
  21. Hall S, Lagoa S (2014) Inflation and business cycle convergence in the Euro Area: empirical analysis using an unobserved component model. Open Econ Rev 25(5):885–908CrossRefGoogle Scholar
  22. Hilbert P (1998) Financial sector reform and monetary policy in the Netherlands. IMF Working Paper 98(19):1–129CrossRefGoogle Scholar
  23. Hooker M (2002) Are Oil Shocks Inflationary? Asymmetric and nonlinear specifications versus changes in regime. J Money, Credit Banking 34:540–561CrossRefGoogle Scholar
  24. Hsiao C, Pesaran M, Pick A (2012) Diagnostic test of cross-section independence for limited dependent variable panel data models. Oxf Bull Econ Stat 74(2):253–277CrossRefGoogle Scholar
  25. Im K, Pesaran M, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econ 115(1):53–74CrossRefGoogle Scholar
  26. IMF (2006) How has globalization affected inflation. World Economic Outlook, April 2006, Chapter 3Google Scholar
  27. Ito T, Koibuchi S, Sato K, Shimizu J (2010) “Determinants of currency invoicing in Japanese exports: a firm-level analysis”, RIETI Discussion Papers, 10034, Japan Research Institute of Economy, Trade and Industry JapanGoogle Scholar
  28. Jimborean R (2011) The exchange rate pass-through in the new EU Member States. Working Papers 341, Banque de FranceGoogle Scholar
  29. Levin A, Lin C, Chu C (2002) Unit roots in panel data: asymptotic and finite-sample Properties. J Econ 108(2002):1–24CrossRefGoogle Scholar
  30. McCarthy J (1999) Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies. BIS Working Papers 79Google Scholar
  31. Mellens C, Noorman H, Verbruggen J (2007) Re-exports: international comparison and implications for performance indicators, Dutch Bureau of Economic Policy Analysis ReportGoogle Scholar
  32. Mishkin F (2008) Exchange rate pass-through and monetary policy. NBER Working Paper, 13889Google Scholar
  33. Nickell S (1981) Biases in dynamic models with fixed effects. Econometrica 49(6):1417–1426CrossRefGoogle Scholar
  34. Otani A, Shiratsuka S, Shirota T (2006) Revisiting the decline in the ERPT: further evidence from Japan’s import prices. Monetary and Economics Studies, March 2006, Bank of JapanGoogle Scholar
  35. Perron P (1989) The great crash, the oil price shock, and the unit root hypothesis. Econometrica 57(6):1361–1401CrossRefGoogle Scholar
  36. Pesaran M (2006) Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74(4):967–1012CrossRefGoogle Scholar
  37. Rogoff K (2003) Globalization and global disinflation. Presented at FRB Kansas City Conference on Monetary Policy and Uncertainty. August, 2003Google Scholar
  38. Sekine T (2006). Time-varying exchange rate pass-through: experiences of some industrial countries. BIS Working Papers No. 202Google Scholar
  39. Taylor J (2000) Low inflation, pass-through, and the pricing power of firms. Eur Econ Rev 44(7):1389–1408CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Department of Economic Policy and Research (EBO)De Nederlandsche Bank, DNB-EBOAmsterdamThe Netherlands

Personalised recommendations