Exchange Rate, Money, and Wages: What is Driving Prices in Armenia?
IMF Working Papers, December 1, 2004
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- Exchange Rate, Money, and Wages: What is Driving Prices in Armenia?
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Bibliographic details
- Authors: David A. Grigorian, Grigor Sargsyan
- Published: December 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451875508.001
Summary and main findings
- 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, the authors 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.
- The authors find no evidence of prices responding to changes in money and wages in a statistically significant manner.
Methodology
- Model: Full information model linking three interrelated markets — foreign exchange, money, and labor.
- Econometric approach: Vector error correction model (VECM).
- Focus: Inflation dynamics and monetary transmission mechanisms in Armenia.
Policy-relevant implications
- Exchange rate developments are a dominant driver of price dynamics in Armenia, implying that policies affecting the exchange rate have strong effects on inflation.
- Traditional money and wage channels appear weak in statistically explaining price changes, suggesting limited short-run efficacy of policies that operate primarily through money supply or wage adjustments for controlling inflation.
- The observed initial overshooting of the price level following exchange rate disequilibria points to potential volatility in inflation outcomes after exchange rate shocks.