Estimates of the exchange rate pass-through to consumer prices in Malta

Abstract

The Exchange Rate Pass-Through (ERPT), commonly defined as the extent to which exchange rate changes are reflected in the price levels of an economy, has important implications in a number of policy-relevant areas. Despite this, estimates of ERPT in the Maltese economy are scarce and do not take into account changes in the monetary regime pertaining to the adoption of the euro. We use local projections to estimate linear and nonlinear ERPT to consumer prices in Malta after adoption of the euro. In line with literature, results point at incomplete ERPT to headline consumer prices, peaking at around 20% by the end of the first year after the exchange rate shock. ERPT to overall Harmonised Index of Consumer Price (HICP) inflation is largely driven by the goods component while ERPT to services prices is largely insignificant across the horizon considered. Allowing for nonlinearities, we find evidence of asymmetric pass-through with larger changes to, as well as depreciations in, the nominal effective exchange rate being consistent with larger pass-through estimates.