Exchange Rate Policy and Inflation in Acceding Countries: The Role of Pass-Through

Abstract

This paper analyzes the link between the choice of exchange rate regime and inflationary performance in four acceding countries to the EU: the Czech Republic, Hungary, Poland and Slovenia. The results allow a clear ranking of countries according to the size of the pass-through effect and the importance of exchange rate shocks to overall inflationary performance. In particular, perfect pass-through effect can be associated with accommodative exchange rate policy, which can moreover become the most important source of inflationary pressures. The analysis suggests that for CEEC-4 an early adoption of the Euro can provide the most efficient framework for reducing inflation.

Keywords: EMU accession, pass-through effect, I(2) cointegration analysis, policy accomodation

JEL Classification: E42, E52, E58, C32