Exchange Rates and Inflation Under Emu: An Update
19 Pages Posted: 19 Oct 2004
There are 2 versions of this paper
Exchange Rates and Inflation Under Emu: An Update
Date Written: August 2004
Abstract
In our recent Economic Policy article (Honohan and Lane, 2003), we argued that the strength of the US dollar 1999-2001 had an important impact on inflation divergence within the EMU and in particular the surge in Ireland's inflation to over 7%. This hypothesis has been subjected to a grueling out-of-sample test: would the dollar's subsequent weakness contribute to inflation convergence and in particular to a fall in Irish inflation? Fortunately for us, the theory has passed the test with flying colors. Irish inflation stopped dead in its tracks: consumer prices were unchanged between May and November of 2003. Regression analysis on quarterly inflation data across EMU members 1999.1-2004.1 confirms the importance of the exchange rate channel, although pinning down the exact dynamic specification will require a further span of data.
Keywords: Inflation, exchange rates, EMU
JEL Classification: E31, E42, F41
Suggested Citation: Suggested Citation
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