Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/228997 
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2383
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper decomposes the time-varying effect of exogenous exchange rate shocks on euro area countries in ation into country-specific (idiosyncratic) and region-wide (common) components. To do so, we propose a exible empirical framework based on dynamic factor models subject to drifting parameters and exogenous information. We show that exogenous shocks to the EUR/USD exchange rate account for over 50% of nominal EUR/USD exchange rate uctuations in more than a third of the quarters of the past six years, especially in turning point periods. Our main results indicate that headline in ation in euro area countries, and in particular its energy component, has become significantly more affected by these exogenous exchange rate shocks since the early 2010s, in particular for the region's largest economies. While in the case of headline in ation this increasing sensitivity is solely reliant on a sustained surge in the degree of comovement, for energy in ation it is also based on a higher region-wide effect of the shocks. By contrast, purely exogenous exchange rate shocks do not seem to have a significant impact on the core component of headline in ation, which also displays a lower degree of comovement across euro area countries.
Subjects: 
Exchange Rate
Ination
Factor Model
Structural VAR model
JEL: 
C32
E31
F31
F41
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4026-9
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.