Pricing to market, exchange rate changes and the transmission of inflation

This paper examines the short-run pass through of exchange rate changes to consumer prices in Ireland. Reflecting the importance of exchange rate expe ctations, we develop a model of inflation where the deviation of the UK pri ce level from its equilibrium level affects the rate of pass through of ext ernal shocks into Irish inflation. This model explains better the behaviour of the Irish rate of inflation in the 1990s and it indicates a reduction i n the speed of adjustment of prices to their equilibrium after the ERM cris is.