The paper estimates a DSGE model of the euro area to evaluate the exchange rate pass-through (ERPT) into euro-area inflation. The ERPT is incomplete because of price discrimination and distribution services. The latter assumption makes the ERPT into import prices at the border different from the ERPT into import prices at retail (consumer) level.
The ERPT is high, especially in correspondence to exchange rate and monetary policy shocks. A positive demand shock generates an appreciation of the euro and higher domestic inflation. The less the central bank responds to the expansionary macroeconomic effects of such a shock, the higher the ERPT into consumer prices.
