Recent Movements in the Euro Exchange Rate and the Impact on Inflation in the Spanish Economy

ECONOMIC BULLETIN 4/2018

Banco de Espana Article 17/18

8 Pages Posted: 23 Oct 2018

See all articles by Danilo Leiva‐Leon

Danilo Leiva‐Leon

Banco de España

Jaime Martinez-Martin

European Central Bank (ECB); Banco de España

Eva Ortega

Bank of Spain, Research Department

Date Written: October 04, 2018

Abstract

The effect of the euro exchange rate on inflation has taken on significant importance recently, with the application of the ECB’s expansionary monetary policy measures having coincided with episodes of euro appreciation, such as that observed between the second half of 2017 and early 2018, which tend to exert downward pressure on imported prices. This article analyses the factors behind the fluctuations in the euro exchange rate against the dollar during the recent period, and finds that this appreciation may have largely been due to the higher relative growth of the euro area, compatible with a pick-up in expected euro area inflation. However, the subsequent depreciation, since February 2018, might reflect factors related to changes in the relative confidence of financial markets to the detriment of the euro, and to the lower relative growth of the euro area compared with the United States. Further, it is documented how the pass-through of exchange rate movements to overall consumer-price inflation in the Spanish economy has increased slightly in recent years, owing mainly to the energy component, while core inflation remains much less sensitive to exchange rate changes.

Keywords: exchange rate, inflation, structural VAR model, time-varying parameters models

JEL Classification: E31, F3, F41

Suggested Citation

Leiva‐Leon, Danilo and Martinez-Martin, Jaime and Ortega, Eva, Recent Movements in the Euro Exchange Rate and the Impact on Inflation in the Spanish Economy (October 04, 2018). ECONOMIC BULLETIN 4/2018; Banco de Espana Article 17/18. Available at SSRN: https://ssrn.com/abstract=3269706

Danilo Leiva‐Leon (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Jaime Martinez-Martin

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Eva Ortega

Bank of Spain, Research Department ( email )

Alcala 50
28014 Madrid
Spain

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