Econometrics of exchange rate pass-through
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Understanding the behaviour of import prices is a key issue for inflation targeting central banks in small open economies. Of particular importance is the responsiveness of import prices to movements in the nominal exchange rate - the degree of exchange rate passthrough. The modern literature on ’new open economy macroeconomics’ has highlighted a variety of factors affecting the degree of pass-through, including market segmentation, the degree of price stickiness, the choice of invoicing currency, the distribution margin, and the degree of competition from domestic firms. Each of these factors has different implications for the transmission mechanism for monetary policy, exchange rate volatility and hence, for optimal monetary policy. An important task for empirical research is therefore to discriminate between the alternative models. In her dissertation, Ida Wolden Bache confronts the theoretical models with data on UK and Norwegian import prices, using alternative empirical methods. In addition, this dissertation provides new evidence on the small-sample properties of the various methods employed in the empirical investigations. The dissertation was submitted in September 2006 as part of the author’s examination for the PhD degree in economics at the University of Oslo. The defence took place on 19 January 2007. Norges Bank is pleased to present this work to a wider audience by publishing it as Doctoral Dissertations in Economics No. 6.