Exchange Rate Pass-Through to Domestic Prices in Eurozone

There are still many opened issues according to the suitability of the common monetary policy in the euro area provided a relative heterogeneity of the single market. However, there seems to be a lack of the recent empirical literature dealing with issues of the nominal exchange rate rigidity in the euro area. In the paper we investigate the two-stage exchange rate pass-through to domestic prices in the Eurozone member countries to examine crucial implications of the nominal exchange rate rigidity. Our results indicate that absorption capabilities of nominal effective exchange rates clearly differ in individual countries. As a result, an increased exposure of domestic prices to the external price shocks in some countries is thus a substantial trade-off of the exchange rate stability.