Exchange Rate Pass-Through and Monetary Integration in the Euro Area

25 Pages Posted: 31 Oct 2011 Last revised: 2 Nov 2011

See all articles by Ayako Saiki

Ayako Saiki

University of London - School of Oriental and African Studies (SOAS); De Nederlandsche Bank - Monetary and Economic Policy Department

Date Written: August 1, 2011

Abstract

The purpose of this study is to examine how monetary integration affects the exchange rate pass-through, by testing whether monetary policy convergence in the euro area led to a convergence in terms of exchange rate pass-through. We conduct a comparative study between the “experiment group” (the euro area) and the “control group” (non-euro industrial countries). We find evidence for stronger convergence of exchange rate pass-through for the euro area economies as a group, especially around the 1980s. The group of non-euro industrial countries also had conditional convergence (convergence with permanent cross-sectional heterogeneity) in exchange rate pass-through, but its cross-sectional dispersion remains substantially larger compared to the euro area. This indicates that monetary integration affects the exchange rate pass-through. This has an important policy implication for the euro area, especially for the new member countries, as their exchange rate pass-through would not remain constant or purely exogenous; it should also converge to the euro area average as they work to achieve the Maastricht Criteria.

Keywords: Monetary Policy, Central Banks and Their Policies, International Monetary Arrangements and Institutions

JEL Classification: E52, E58, F33

Suggested Citation

Saiki, Ayako, Exchange Rate Pass-Through and Monetary Integration in the Euro Area (August 1, 2011). De Nederlandsche Bank Working Paper No. 308, Available at SSRN: https://ssrn.com/abstract=1951878 or http://dx.doi.org/10.2139/ssrn.1951878

Ayako Saiki (Contact Author)

University of London - School of Oriental and African Studies (SOAS)

10 Thornhaugh Street
Russell Square
London, WC1H 0XG
United Kingdom

De Nederlandsche Bank - Monetary and Economic Policy Department

POBox 98
Amsterdam, 1000AB
Netherlands

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