Exchange Rate, Money, and Wages: What is Driving Prices in Armenia?

Author/Editor:

Armine Khachatryan ; David A. Grigorian ; Grigor Sargsyan

Publication Date:

December 1, 2004

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper is the first attempt to look at inflation dynamics and monetary transmission mechanisms in Armenia in the context of a full information model containing three interrelated markets: foreign exchange, money, and labor. Using the vector error correction model (VECM) approach, we find that the exchange rate pass-through to prices is very strong relative to credit, wage, and interest rate channels. The analysis suggests a relatively fast adjustment of prices to long-run disequilibria in the exchange rate market, albeit with initial overshooting of the price level. In addition, we find no evidence of prices responding to changes in money and wages in a statistically significant manner.

Series:

Working Paper No. 2004/229

Subject:

Currency markets Demand for money Exchange rates Financial markets Foreign exchange Labor Money Real exchange rates Wages

English

Publication Date:

December 1, 2004

ISBN/ISSN:

9781451875508/1018-5941

Stock No:

WPIEA2292004

Pages:

30

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