Has exchange rate pass-through really declined? Evidence from Canada

Hafedh Bouakez and Nooman Rebei

Journal of International Economics, 2008, vol. 75, issue 2, 249-267

Abstract: Several empirical studies suggest that exchange rate pass-through has declined in recent years among industrialized countries. Results for Canada also indicate that import and consumer prices have become less responsive to exchange-rate movements in the 1990s. These findings are based on reduced-form regressions that are typically motivated by partial-equilibrium models of pricing. This paper uses instead a structural, general-equilibrium approach to test the premise that exchange rate pass-through has decreased in Canada. Our approach consists in estimating a dynamic stochastic general-equilibrium model for Canada over two sub-samples, which cover the periods before and after the adoption of inflation targeting by the Bank of Canada. We then use impulse-response analysis to assess the stability of exchange rate pass-through across the two sub-samples. Our results indicate that pass-through to Canadian import prices has been rather stable, while pass-through 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.

Date: 2008
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Citations: View citations in EconPapers (98)

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