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Exchange Rate Pass-Through to Consumer Prices: Theory and Recent Evidence

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  • Laurence Savoie-Chabot
  • Mikael Khan

Abstract

In an open economy such as Canada’s, exchange rate movements can have a material impact on consumer prices. This is particularly important in the current context, with the significant depreciation of the Canadian dollar vis-a-vis the U.S. dollar since late 2012. This paper provides a broad overview of the various mechanisms by which exchange rate movements pass through to consumer prices and discusses the implications of exchange rate pass-through (ERPT) for the conduct of monetary policy. It then describes some of the tools used at the Bank of Canada to help quantify ERPT. We conclude by taking a closer look at the current situation in Canada, presenting a range of evidence that suggests ERPT has played an important role in recent inflation dynamics.

Suggested Citation

  • Laurence Savoie-Chabot & Mikael Khan, 2015. "Exchange Rate Pass-Through to Consumer Prices: Theory and Recent Evidence," Discussion Papers 15-9, Bank of Canada.
    • Handle: RePEc:bca:bocadp:15-9
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    References listed on IDEAS

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    1. José Dorich & Michael K. Johnston & Rhys R. Mendes & Stephen Murchison & Yang Zhang, 2013. "ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model," Technical Reports 100, Bank of Canada.
    2. Olivier Gervais & Marc-André Gosselin, 2014. "Analyzing and Forecasting the Canadian Economy through the LENS Model," Technical Reports 102, Bank of Canada.
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    Cited by:

    1. Vugar Rahimov & Nigar Jafarova & Fuad Ganbarov, 2017. "The Exchange Rate Pass-Through to CPI and its components in Oil-Exporting CIS Countries," IHEID Working Papers 06-2017, Economics Section, The Graduate Institute of International Studies.
    2. Diby François Kassi & Dilesha Nawadali Rathnayake & Akadje Jean Roland Edjoukou & Yobouet Thierry Gnangoin & Pierre Axel Louembe & Ning Ding & Gang Sun, 2019. "Asymmetry in Exchange Rate Pass-Through to Consumer Prices: New Perspective from Sub-Saharan African Countries," Economies, MDPI, vol. 7(1), pages 1-33, January.
    3. Mikael Khan & Louis Morel & Patrick Sabourin, 2015. "A Comprehensive Evaluation of Measures of Core Inflation for Canada," Discussion Papers 15-12, Bank of Canada.
    4. ?lyas ??klar & Merve Kocaman & Sevcan Kapkara, 2017. "Exchange Rate Pass-Through to Domestic Prices: The Turkish Case (2002-2014)," Business and Economic Research, Macrothink Institute, vol. 7(2), pages 202-211, December.
    5. Forbes, Kristin & Hjortsoe, Ida & Nenova, Tsvetelina, 2018. "The shocks matter: Improving our estimates of exchange rate pass-through," Journal of International Economics, Elsevier, vol. 114(C), pages 255-275.
    6. Vietha Devia S.S., 2019. "The Correlation of Exchange Rate and Inflation and Its Effect on Stock Markets. Case Study on Consumer Good Index Indonesia: 2004 – 2017," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 5(2), pages 32-44, June.
    7. Bossone, Biagio, 2019. "The portfolio theory of inflation (and policy effectiveness)," Economics Discussion Papers 2019-29, Kiel Institute for the World Economy (IfW Kiel).
    8. Paul Corrigan & Hélène Desgagnés & José Dorich & Vadym Lepetyuk & Wataru Miyamoto & Yang Zhang, 2021. "ToTEM III: The Bank of Canada’s Main DSGE Model for Projection and Policy Analysis," Technical Reports 119, Bank of Canada.
    9. Zhe Chen & Michael B. Devereux & Beverly Lapham, 2017. "The Canadian border and the US dollar: The impact of exchange rate changes on US retailers," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1525-1555, December.
    10. Fan, Jiaping & Anders, Sven & Qiu, Feng, 2022. "Vertical Price Transmission in the Canadian Beef Industry: Does the Canada-US Exchange Rate Matter?," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 23(1), June.
    11. Ibrahim Abdulhamid Danlami, 2020. "Revisiting the West African Commonwealth Countries’ Exchange Rate Pass-Through to Inflation," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 6(1), pages 70-77, March.
    12. Ibrahim Abdulhamid Danlami & Sallahuddin Hassan & Mohamad Helmi Bin Hidthiir, 2020. "Assessing the Asymmetry of the Exchange Rate Pass-Through to Inflation in West African Commonwealth Countries," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 6(1), pages 93-109, March.
    13. Ugwu Ephraim & Amassoma Ditimi & Ehinomen Christopher, 2021. "Investigating Exchange Rate Pass-through to Consumer Prices in Nigeria," Folia Oeconomica Stetinensia, Sciendo, vol. 21(1), pages 105-121, June.
    14. Bossone, Biagio, 2019. "The portfolio theory of inflation and policy (in)effectiveness," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-25.
    15. Younus, Rijja Ali & Yucel, Eray, 2020. "Exchange Rate Pass-Through in Pakistan," MPRA Paper 98955, University Library of Munich, Germany.
    16. Stella Mnoyan, 2019. "Exchange Rate Pass-through in Armenia," Working Papers 13, Central Bank of the Republic of Armenia, revised Dec 2019.
    17. Rose Cunningham & Christian Friedrich & Kristina Hess & Min Jae Kim, 2017. "Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices," Discussion Papers 17-12, Bank of Canada.

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    More about this item

    Keywords

    Exchange rates; Inflation and prices;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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