The effect of changes in exchange rates, oil prices and interest rates on inflation in the Euro area : an empirical study using ARDL approach

Abstract EN

The paper re-examines the effect of changes in both exchange rates, oil prices, and interest rates on inflation in the euro area over the period 1999(Q1)-2019(Q4) using autoregressive distributed Lag (ARDL) bounds testing.

The main findings of this paper are as follows: (i) The results of the bound cointegration test give evidence in support of long-run relationship among the variables (ii) The results support the existence of the exchange rate pass-through to inflation on the long term (iii) On the contrary, the results suggest the existence of the oil price pass-through into euro area inflation in the short term (iv) The results of this study also provide sufficient evidence for the effectiveness of the interest rate channel-specifically short-term interest rates in curbing inflation in the euro area.

However, the findings of the study show that the euro area is suffering from cost-push inflation.