Exchange Rate Pass-Through and Market Structure in Multi-Country World

Micro-estimates of exchange rate pass-through yield elasticities well outside the range of values predicted by the existing theory. I provide a multi-country quadratic utility model to examine how export prices are affected by movements in own-currency and cross-currency exchange rates, and estimate the own-currency and cross-currency exchange rate pass-through elasticity of export prices from Canada to the U.S. In the model, own-currency appreciations move firms along the demand curve while cross-currency appreciations shift the position of the demand curve. Both affect the firm's elasticity of demand and therefore the degree to which exchange rate movements affect prices. When own-currency and cross-currency exchange rates are correlated, the model predicts exchange rate pass-through elasticities that match facts. In the empirical part, I show that cross-currency exchange rate pass-through exists in about one-third of the sample products.