308 - Exchange Rate Pass-Through and Monetary Integration in the Euro Area

DNB Working Papers
Date 11 August 2011

The purpose of this study is to examine how monetary integration affects the exchange rate pass-through, by testing whether monetary policy convergence in the euro area led to a convergence in terms of exchange rate pass-through. We conduct a comparative study between the “experiment group” (the euro area) and the “control group” (non-euro industrial countries).  We find evidence for stronger convergence of exchange rate pass-through for the euro area economies as a group, especially around the 1980s.  The group of non-euro industrial countries also had conditional convergence (convergence with permanent cross-sectional heterogeneity) in exchange rate pass-through, but its cross-sectional dispersion remains substantially larger compared to the euro area.  This indicates that monetary integration affects the exchange rate pass-through.  This has an important policy implication for the euro area, especially for the new member countries, as their exchange rate pass-through would not remain constant or purely exogenous; it should also converge to the euro area average as they work to achieve the Maastricht Criteria.

Keywords: Monetary Policy, Central Banks and Their Policies, International Monetary Arrangements and Institutions.

JEL Classification: E52, E58, F33.