The Sensitivity of Producer Prices to Exchange Rates: Insights from Micro Data
AbstractThis paper studies the sensitivity of Canadian producer prices to the Canada-U.S. exchange rate. Using a unique product-level price data set, we estimate and analyze the impact of movements in the exchange rate on both domestic and export producer prices. First, we find that both domestic and export prices are sensitive to movements in the exchange rate. A one percent depreciation in Canadian dollar is associated with a 0.18 (0.25 conditional on price changes in the currency of pricing) percent increase in domestic prices, and a 0.39 (0.60 conditional on price changes in the currency of pricing) percent increase in export prices (once prices are converted into a single currency). Next, we find that there is an important difference in export price sensitivity to the exchange rate depending on the currency of pricing. Those Canadian producers that invoice their exported products in Canadian dollars do not adjust prices to movements in the exchange rate. Meanwhile, those invoicing in U.S. dollars increase their Canadian dollar prices when the Canadian dollar depreciates. Finally, for the same good sold in both the domestic and U.S. markets, the currency of pricing appears to play an important role in determining mark-up adjustment and the degree of pricing to market. These findings shed light on understanding the sources of incomplete exchange rate pass-through into import prices, as well as the indirect effect of the exchange rates on domestic prices through import competition and the use of imported inputs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 12-20.
Length: 34 pages
Date of creation: 2012
Date of revision:
Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Exchange rates; Inflation and prices; Market structure and pricing;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-29 (All new papers)
- NEP-HME-2012-07-29 (Heterodox Microeconomics)
- NEP-MON-2012-07-29 (Monetary Economics)
- NEP-OPM-2012-07-29 (Open Economy Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
- Peter J. Klenow & Oleksiy Kryvtsov, 2008.
"State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?,"
The Quarterly Journal of Economics,
MIT Press, vol. 123(3), pages 863-904, August.
- Oleksiy Kryvtsov & Peter J. Klenow, 2004. "State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation?," Computing in Economics and Finance 2004 277, Society for Computational Economics.
- Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Working Papers 05-4, Bank of Canada.
- Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
- Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," NBER Working Papers 11043, National Bureau of Economic Research, Inc.
- Dong, Wei, 2012.
"The role of expenditure switching in the global imbalance adjustment,"
Journal of International Economics,
Elsevier, vol. 86(2), pages 237-251.
- Wei Dong, 2010. "The Role of Expenditure Switching in the Global Imbalance Adjustment," Working Papers 10-16, Bank of Canada.
- Gita Gopinath & Oleg Itskhoki, 2008.
"Frequency of Price Adjustment and Pass-through,"
NBER Working Papers
14200, National Bureau of Economic Research, Inc.
- Bouakez, Hafedh & Rebei, Nooman, 2008. "Has exchange rate pass-through really declined? Evidence from Canada," Journal of International Economics, Elsevier, vol. 75(2), pages 249-267, July.
- Marazzi, Mario & Sheets, Nathan, 2007. "Declining exchange rate pass-through to U.S. import prices: The potential role of global factors," Journal of International Money and Finance, Elsevier, vol. 26(6), pages 924-947, October.
- Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010.
"Currency Choice and Exchange Rate Pass-Through,"
American Economic Review,
American Economic Association, vol. 100(1), pages 304-36, March.
- Pinelopi Goldberg & Rebecca Hellerstein, 2009.
"How Rigid Are Producer Prices?,"
1184, Princeton University, Department of Economics, Center for Economic Policy Studies..
- Nicholas Li, 2014. "Sticker Shock: The Causes of the Canada-US Price Differential," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 409, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.