Abstract

This study examines the pass-through effect of fluctuations in the exchange rate on inflation in China in comparison with similar effects in the Eurozone and the United States. Using a set of monthly data covering the period 1999 through 2015 for each case, we constructed a Vector Auto Regressive (VAR) model as well as an Error Correction model (VECM) to estimate the pass-through effects in the three cases. In addition, to ensure that our results are statistically unbiased we also tested the stationarity of the variables of the model. Moreover, to distinguish between the short-run and long-run pass-through effects, we made use of a series of co-integration tests. Our results indicate that the pass-through effect of changes in the exchange rate in China is much weaker than it is in the Eurozone and the United States. We found this effect in the U.S. to be both more notable and longer-lasting.

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