Has Exchange Rate Pass-Through Really Declined in Canada?

Several empirical studies suggest that exchange rate pass-through has declined in recent years in industrialized countries. Results for Canada also indicate that, in the 1990s, import and consumer prices became less responsive to exchange rate movements. These findings are based on reducedform regressions that are typically motivated by partial-equilibrium models of pricing. Bouakez and Rebei instead use a structural, general-equilibrium approach to test the premise that exchange rate pass-through has decreased in Canada. Their approach consists in estimating a dynamic stochastic general-equilibrium model for Canada over two subsamples, which cover the periods before and after the Bank's adoption of inflation targeting. The authors then use impulse-response analysis to assess the stability of exchange rate pass-through across the two subsamples. Their results indicate that pass-through to Canadian import prices has been rather stable, while passthrough to Canadian consumer prices has declined in recent years. Counterfactual experiments reveal that the change in monetary policy regime is largely responsible for this decline.

Also published as:

Has exchange rate pass-through really declined? Evidence from Canada
Journal of International Economics (0022-1996)
July 2008. Vol. 75, Iss. 2; p. 249-67