Exchange rate pass‐through, exchange rate disconnect and exchange rate regimes

Abstract

This article investigates the degree of Exchange Rate Pass-Through (ERPT) into import prices for the Hellenic economy, during its post-Bretton Woods and pre-European Monetary Union (pre-EMU) era 1975–1998. Using multivariate cointegration techniques, we provide empirical evidence for complete long-run and incomplete short-run ERPT coefficients. The pattern of trade, which reflects the production pattern as well as intervention policies, appearing from the country's course towards EMU, justifies these estimations. Complete ERPT and estimated disconnection of the exchange rate of the Hellenic Drachmae from the real industrial production may be accepted as an argument in favour of joining the euro, within a single criterion of Optimum Currency Areas' theory.

Acknowledgements

We are grateful to with our colleagues Professor D. Kirikos, Professor D. Terzakis and Assistant Professor S. Arvanitis of the Higher Technological Educational Institute of Crete, Hellas (http://www. teicrete.gr), as well as Professor E. Thalassinos of the University of Piraeus (http://www.unipi.gr) and Professor A. Cartapanis of the Mediterranean University (http://www.univ-cefi.fr/rubrique.php3? id_rubrique=2) Aix-Marseille II, France. We also thank the anonymous referees in ICABE 2007 (http://www.icabe.gr) and HFAA 2007 (http://www.hfaa.gr/home_gr.htm) international conferences for their helpful comments on previous versions of this article. The usual disclaimer applies.

Notes

¹The aforementioned four main trade partners of Hellas cover for Europe's zone total imports approximately and on average for the sample period, 60% of the agricultural goods (0 + 1 + 4 categories of the Standard International Trade Classification (SITC)), 45% of the raw materials (2+3 of the SITC) and 68% in the manufacturing goods (5 + 6 + 7 + 8 + 9 of the SITC). In addition, the intra-Europe Hellenic imports represent approximately and on average during the sample period, 83% in agricultural goods, 28% in raw materials and 80% in manufacturing goods, respectively, of the great total from all over the globe (Organization for Economic Co-operation and Development (OECD), 1997 and 2005, in International Trade by Commodity Statistics, SITC-Revision 2, in current US$ prices).

²These unit root tests have been performed using STATA release 9.

³The dummies are used to deal with the lack of normality in the residuals of our VECMs. These refer to a constant {c}, linear trend and centred seasonal {seas} or intervention dummies, such as Di8034_t  = −1_{{t = 1980q3}} + 1_{{t = 1980q4}} and Di8234_t  = −1_{{t = 1982q3}} + 1_{{t = 1982q4}}, Di8112_t  = 1_{{t = 1981q1}} − 1_{{t = 1981q2}}, Di8245_t  = −1_{{t  = 1982q4}} + 1_{{t  = 1983q1}}, Di9812_t  = −1_{{t = 1998q1}} + 1_{{t = 1998q2}}, which are transitory intervention dummies to accommodate for shocks in p_jt (Di8034, and Di8234), Hellenic pre-elections period (Di8112_t ), or temporary shocks in p_jt , when j = UK (Di8245 and Di9812); Di8385_t =1_{{t = 1983q1}} − 1_{{t = 1983q2}} + 1_{{t = 1985q4}} − 1_{{t = 1986q1}} is the impulse dummy to accommodate for two de jure devaluations of the GRD in March 1983 and October 1985; DS861_t  = 1_{{t ≥ 1986q1}} is a shift dummy marking the deceleration of the growth rate of GRD's sliding parity by the BoG.

⁴We used the software Cointegration Analysis of Time Series (CATS) within the software Regression Analysis of Time Series (RATS), version 2, by J. G. Dennis, H. Hansen, S. Johansen and K. Juselius, Estima 2005.

⁵With the exclusion of road vehicles (78), other transport equipments (79), general industrial machinery and equipment (74), we may mention as examples, iron and steel (67), cereals and cereal preparations (04), meat and meat preparations (01), textile yarn, fabrics, made-up articles, related products (65), etc.

⁶For instance, road vehicles (78), machinery specialized for particular industries (72), other transport equipments (79), general industrial machinery and equipment (74).

⁷For instance, electrical machinery (77), textile yarn, fabrics, made-up articles, related products (65), leather, leather manufactures, n.e.s. and dressed furs (61), telecommunications and sound recording apparatus (76), artificial resins, plastic materials, cellulose esters and ethers (58), etc.

⁸This year Hellas officially enters into European Economic Communities (EECs).

⁹Abolition of Hellenic import tariffs or other trade barriers for intra-EEC imports.

¹⁰Deliberation of Hellenic money and capital markets for intra-EEC trades.

¹¹Entrance of the GRD in the Exchange Rate Mechanism II (ERM II) of the European Monetary System (EMS), after its de jure devaluation of 15% against ECU, so as to satisfy the EMU agreement criteria for 2 years' monetary stability before a member state's application.