Exchange rate pass-through analysis for Czech Republic and Poland: implications towards eurozone accession

Exchange rate pass-through (ERPT) is a useful tool for describing properties of exchange rate shock-transmission into domestic prices. This type of analysis is of great relevance for small open economies such as Czech Republic and Poland, especially in situation of prospective ERM-II regime participation with subsequent eurozone accession. Existing pass-through studies for current and former eurozone candidate economies show diverse ERPT results, depending on the methodology used, as well as on objective economic circumstances in different countries. We analyze and compare the short-term and long-term pass-through ERPT behavior for Czech Republic and Poland. Our estimated long-term ERPT for Czech Republic is approximately 25% and just under 10% for Poland. Impacts from low-inflation and inflation targeting environment are considered, along with other implications, as the ERPT analysis may serve as a basis for improved predictions of monetary and real sector indicators for small open economies.