Exchange Rate Pass-Through to Domestic Prices in New EU Member Countries

European Union member countries are currently exposed to the large complex of the economic crisis implications. Poor macroeconomic performance together with an increased uncertainty on the financial markets causes is accompanied with increased exchange rate volatility. As the result exchange rates determine macroeconomic development of the countries during the crisis period the way that seems to differ in comparison with the pre-crisis period. Considering the wide variety of effects that exchange rates transmit to the domestic economy from abroad in the paper we focus on the external price impulses and their impact on the domestic price indexes in the new EU member states. VAR methodology is implemented to investigate responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. Our results revealed differences in absorption capabilities of exchange rates in countries with rigid and flexible exchange rate arrangements. Implications are even stronger considering distortionary effects of the crisis period.