Model, Data and Methodology

Abstract

This chapter discusses the data and methodology of the study. It is organised in 5 sections. It begins by deriving the models used to estimate the degree of exchange rate pass-through and the determinants of inter-product differences in exchange rate pass-through. These models are based on the theory developed in Chapter 2. Salient features of the data base are discussed in Section 3, while Section 4 defines and describes the variables used in the ensuing econometric analysis, with emphasis on the method of construction. The econometric methodology is discussed in two stages in Section 5. The estimation of the exchange rate pass-through coefficients involves the analysis of time-series data. The econometric issues relevant to this type of analysis are discussed in Section 5.5.1. Emphasis is given to recent developments in the analysis of the time-series properties of the data, particularly in relation to stationarity and cointegration. The analysis of the determinants of inter-product differences in exchange rate pass-through involve the analysis of cross-sectional data. The econometric issues relevant to the cross-section analysis are discussed in Section 5.5.2. A final section provides a summary of major points.