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Exchange rate pass-through in a set of euro area prices along the pricing chain is examined in this paper. First, a vector autoregression (VAR) approach is used to analyze the joint time-series behavior of the euro exchange rate and a system of area-wide prices in response to an exchange rate shock. Second, the impulse-response functions from the VAR estimates are used to identify—in a ‘new open-economy macroeconomics model’—the key behavioral parameters that best replicate the pattern of exchange rate pass-through in the euro area. A key finding is that traded goods—both extra-area exports and imports—behave as though they are predominately priced in euros. The area-wide findings are compared with those for other major industrial economies. [ABSTRACT FROM AUTHOR]

Analyzes the effects of exchange rate volatility and bilateral trade flows in Europe. Use of gravity model and panel data to examine the effects; Impact of exchange rate uncertainty on international trade; Implications for endogenous behavior of monetary authorities.