Discussion Papers, Department of Economics, Universität Bern 12-05
The extent to which exchange rate fluctuations are passed through to domestic prices is of high relevance for open economies and for monetary authorities targeting price stability. Existing empirical studies estimating the exchange rate pass-through for Switzerland are based on either single equation estimation or on VAR models. However, these approaches feature some major drawbacks. The former cannot account for dynamic interactions between the time series and both methods disregard longrun equilibrium relations between the variable levels. This paper contributes to the evidence on the exchange rate pass-through in Switzerland by using a vector error correction model, which has the advantage of incorporating both short-run dynamics and long-run equilibrium relations among variables. The results reveal a significant impact of exchange rate shocks on various price (sub-)indices. Passthrough to import prices is substantial both in the short-run and in the long-run and occurs relatively quickly. It is slower, but still considerable in the long-run forthe consumer price index and some of its sub-indices. Producer prices react significantlyto exchange rate shocks as well. In contrast, consumer price inflation for services and for goods of domestic origin show hardly any significant response. The findings of this paper indicate a decline in the pass-through over time.
exchange rate pass-through consumer prices import prices cointegration vector error correction models new open economy macroeconomic model