Exchange rate pass-through to inflation in Slovakia

The extent to which exchange rate movements affect consumer prices in a given country depends on a number of micro and macro elements. This Country Focus discusses the relevance of theoretical determinants of the exchange rate passthrough
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. The impact could thus be spread over a longer time period and could, as a result, continue to favourably affect inflation even after Slovakia's entry into the euro-area on 1 January 2009.