EXCHANGE-RATES AND PRICES - AN EMPIRICAL-ANALYSIS

The effects of exchange rates on domestic prices are investigated in the context of a semi-structural model of exchange rate determination in which both exchange rates and prices are determined endogenously. We assume, and impose for the estimation, that the exchange rate is cointegrated with its ''fundamentals.'' The central result of the paper is that exchange rates have relatively small effects on national price levels for the G7 countries. The effects are largest for the United Kingdom, followed by the United States and Canada. They are strongest when prices are measured by the producer price index.