Exchange Rate, Money, and Wages: What is Driving Prices in Armenia?

30 Pages Posted: 9 Feb 2006

See all articles by David Grigorian

David Grigorian

International Monetary Fund (IMF)

Grigor Sargsyan

International Monetary Fund; Central Bank of Armenia; Michigan State University

Armine Khachatryan

World Bank - Office of the Executive Director

Date Written: December 2004

Abstract

This paper is the first attempt to look at inflation dynamics and monetary transmission mechanisms in Armenia in the context of a full information model containing three interrelated markets: foreign exchange, money, and labor. Using the vector error correction model (VECM) approach, we find that the exchange rate pass-through to prices is very strong relative to credit, wage, and interest rate channels. The analysis suggests a relatively fast adjustment of prices to long-run disequilibria in the exchange rate market, albeit with initial overshooting of the price level. In addition, we find no evidence of prices responding to changes in money and wages in a statistically significant manner.

Keywords: Armenia, price dynamics, error correction model

JEL Classification: E4, E5, F4

Suggested Citation

Grigorian, David A. and Sargsyan, Grigor and Khachatryan, Armine, Exchange Rate, Money, and Wages: What is Driving Prices in Armenia? (December 2004). IMF Working Paper No. 04/229. Available at SSRN: https://ssrn.com/abstract=879054

David A. Grigorian (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Grigor Sargsyan

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Central Bank of Armenia ( email )

6 Vazgen Sargsyan St
Yerevan, 375010
Armenia

Michigan State University ( email )

East Lansing, MI 48824
United States

Armine Khachatryan

World Bank - Office of the Executive Director ( email )

Washington, DC
United States

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