Pass-through of external shocks along the pricing chain: A panel estimation approach for the euro area

in Appendix II). The numbers designate the significant lags of each variable. For example,
energy commodity prices (COMENE) were significant in the equations of PPI energy (lags 0
to 3) and PPI consumer goods (lag 2), while they have a more indirect effect on all other price
components through the pricing chain. This indicates that most imported energy seems to be
processed in the euro area before entering the production process of consumer goods. Food
commodity prices (COMFD) appear to be relevant for PPI consumer goods and the HICP
processed food component, while commodity prices of industrial raw materials have a direct
impact only on intermediate goods producer prices. The nominal effective exchange rate
(NEER) is significant for all PPI and HICP components except for processed food HICP. The
VAT rate is significant for all consumer goods prices. All equations include either the output
gap or unit labour costs (or both), with the output gap having apparently a small impact on
inflation which is in line with the literature (see for example Musso, Stracca and van Dijk
(2009)). Trade openness can affect euro area prices through a number of channels and we
therefore do not have a prior belief on the sign of the variable. The variable turns out to be
positive and significant in the PPI energy equation, while it is negative and significant for PPI
consumer goods, HICP processed food and services. A negative sign could be an indication of
a downward impact of globalisation through trade openness on euro area prices. At the same
time, the impact on PPI energy could be positive as the entry of emerging markets on the
global market tends to lead to higher energy prices, particularly oil, thereby affecting PPI
energy positively. Finally, energy taxes are significant only for PPI energy.

Table 3 Selected causalities between price variables

The numbers designate the significant lags of each variable. NEER: nominal effective exchange rate of the euro;
COMENE: energy commodity prices in USD; COMFD: food commodity prices in USD; COMIRM: industrial raw
material prices in USD; VAT: value added tax; ULC: unit labour costs; YGAP: output gap; EXTRA_OPEN: extra-
euro area trade openness; ENETAX: energy taxes; PPI_ENE: PPI energy; PPI_INT: PPI intermediate goods;
PPI_CONS: PPI consumer goods; HICP_FDPR: HICP processed food; HICP_NEIG: HICP non-energy
industrial goods; HICP_SERV: HICP services.

ECB ■

Working Paper Series No 1104
November 2009∣   13

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