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Cost Pass-Through with Capacity Constraints and International Linkages

Author

Listed:
  • Reinhard Ellwanger
  • Hinnerk Gnutzmann
  • Piotr Śpiewanowski

Abstract

Commodity markets are linked through international trade but are separated by heterogeneous regulations and input markets. We investigate theoretically and empirically how regional, as opposed to global, cost shocks pass through into global prices. Capacity constraints mitigate the output response to regional cost shocks in the short run. Once constraints bind, the pass-through of a cost increase is enhanced while for cost decreases it drops to zero. We study the market for ammonia, a commodity produced largely from natural gas, to highlight the nonlinearity of the cost pass-through and its implications for unilateral climate policies.

Suggested Citation

  • Reinhard Ellwanger & Hinnerk Gnutzmann & Piotr Śpiewanowski, 2023. "Cost Pass-Through with Capacity Constraints and International Linkages," Staff Working Papers 23-16, Bank of Canada.
    • Handle: RePEc:bca:bocawp:23-16
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    References listed on IDEAS

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    More about this item

    Keywords

    Climate change; Econometric and statistical methods; Inflation and prices; International topics;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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