Exchange Rates and Inflation Under Emu: An Update

19 Pages Posted: 3 Jun 2005

See all articles by Patrick Honohan

Patrick Honohan

Trinity College Dublin - Department of Economics; Peter G. Peterson Institute for International Economics; Centre for Economic Policy Research (CEPR)

Philip R. Lane

Trinity College (Dublin) - Department of Economics; Centre for Economic Policy Research (CEPR); Central Bank of Ireland

Multiple version iconThere are 2 versions of this paper

Date Written: 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 percent. 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: Exchange rates, inflation, EMU

Suggested Citation

Honohan, Patrick and Lane, Philip R., Exchange Rates and Inflation Under Emu: An Update (2004). IIIS Discussion Paper No. 31. Available at SSRN: https://ssrn.com/abstract=735483 or http://dx.doi.org/10.2139/ssrn.735483

Patrick Honohan (Contact Author)

Trinity College Dublin - Department of Economics ( email )

Dublin 2
Ireland

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

33 Great Sutton St,
Clerkenwell,
London, EC1V 0DX
United Kingdom

Philip R. Lane

Trinity College (Dublin) - Department of Economics ( email )

Trinity College
Dublin 2
Ireland
+353 1 608 2259 (Phone)
+353 1 677 2503 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

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