Exchange rate pass-through to inflation in Slovakia

The extent to which exchange rate movements impact on consumer prices in a given country depends on a number of micro and macro determinants. This Country Focus discusses the relevance of the theoretical determinants of the exchange rate pass-through to inflation in the case of Slovakia. Subsequently, empirical estimates of the pass-through elasticity for Slovakia, based on several methods, are presented. While econometric estimates suggest that the sensitivity of consumer prices in Slovakia to exchange rate developments is relatively high, a close analysis of inflation data concludes that the disinflationary impact of the recent exchange rate appreciation might have been smaller than implied by model-estimated elasticities. It could thus be spread over a longer time period and as a result, continue to favourably affect inflation even after Slovakia's entry into the euro-area on 1 January 2009.