Exchange Rate Pass-Through in Central and Eastern Europe: A Panel Bayesian VAR Approach

In this paper we estimate average and individual countries’ exchange rate pass-through to producer and consumer price indices in four Central and Eastern Europe countries (Romania, the Czech Republic, Hungary and Poland) within a Panel Bayesian VAR model. This method makes it possible to efficiently combine static and dynamic interrelations with any possible heterogeneity within the units. The resulting average long-run pass-through coefficients are about 0.5 for producer prices and 0.3 for consumer prices (with around 0.25 in the short run for producer prices and no immediate pass-through for consumer prices), with the estimates for Hungary and the Czech Republic generally situated above the group average and Romania and Poland below the average. Subsample estimates showed that starting in 2008 pass-through enlarged slightly, given the increased macroeconomic distress during this period, while the countries in the study display a higher endogenously determined degree of homogeneity.