Exchange Rate, Money, and Wages: What is Driving Prices in Armenia?
December 1, 2004
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Summary
This paper is the first attempt to look at inflation dynamics and monetary transmission mechanisms in Armenia in the context of a full information model containing three interrelated markets: foreign exchange, money, and labor. Using the vector error correction model (VECM) approach, we find that the exchange rate pass-through to prices is very strong relative to credit, wage, and interest rate channels. The analysis suggests a relatively fast adjustment of prices to long-run disequilibria in the exchange rate market, albeit with initial overshooting of the price level. In addition, we find no evidence of prices responding to changes in money and wages in a statistically significant manner.
Subject: Currency markets, Demand for money, Exchange rates, Financial markets, Foreign exchange, Labor, Money, Real exchange rates, Wages
Keywords: Armenia, Central and Eastern Europe, Currency markets, Demand for money, error correction model, error correction terms, Exchange rates, interest rate, monetary policy implementation, monetary policy transmission mechanisms, narrow money, price, price dynamics, price level, Real exchange rates, treasury bill market, Wages, WP
Pages:
30
Volume:
2004
DOI:
Issue:
229
Series:
Working Paper No. 2004/229
Stock No:
WPIEA2292004
ISBN:
9781451875508
ISSN:
1018-5941
