Globalization and exchange-rate pass-through in Europe: Is there a link?

Abstract

This paper assesses the impact of globalization on Exchange-Rate Pass-Through into import prices in three core eurozone countries characterized by different degrees of openness. We looked at various indicators of globalization and used data since 1983 to find evidence of a generalized link between globalization and Exchange-Rate Pass-Through. In particular, factors related to trade integration, such as an increase in the import penetration rate or lower trade tariffs, reduce the degree of Exchange-Rate Pass-Through. However, the rising prominence of China in European imports does not contribute to the decline in pass-through. Overall, our findings show that while Exchange-Rate Pass-Through is incomplete, it remains significant even when controlling for the effects of trade globalization.