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Exchange Rate Pass-through in Canadian Manufacturing: Its Direct and Indirect Components

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  • Stan Kardasz

    (Department of Economics, University of Waterloo)

  • Ken Stollery

    (Department of Economics, University of Waterloo)

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    Abstract

    Changes in the exchange rate have direct and indirect effects on the prices of domestically produced goods and imports in the domestic market. The direct effects originate with the impact of the exchange rate on the marginal cost of imports; the indirect effects, with its impact on the price of materials used by domestic producers and hence on their marginal costs. Direct and indirect exchange rate pass-through elasticities are estimated for thirty-seven Canadian manufacturing industries and their determinants are examined in a cross-section analysis. We find that the direct and indirect elasticities are approximately equal in size for domestic goods, while the direct effect is dominant for imports. For a small number of industries, the net result of the direct and indirect effects is that a depreciation of the domestic currency increases the competitiveness of imports, contrary to conventional analysis. Important determinants of the direct (indirect) elasticities are the import share and non-tariff barriers (the responsiveness of domestic costs to changes in the exchange rate, and concentration).

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    Bibliographic Info

    Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 04001.

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    Length: 36 pages
    Date of creation: Jan 2004
    Date of revision: Jan 2004
    Handle: RePEc:wat:wpaper:04001

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    Web page: http://economics.uwaterloo.ca/
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    1. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers, Michigan State - Econometrics and Economic Theory 8905, Michigan State - Econometrics and Economic Theory.
    2. Feinberg, Robert M, 1989. "The Effects of Foreign Exchange Movements on U.S. Domestic Prices," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 505-11, August.
    3. Letourneau, R. & Lester, J., 1988. "Econometric Estimates Of Import Price Elasticities For Canada," Working Papers-Department of Finance Canada, Department of Finance Canada 1988-5, Department of Finance Canada.
    4. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 35(3), pages 1243-1272, September.
    5. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 93-106, March.
    6. Harry Bloch, 1974. "Prices, Costs, and Profits in Canadian Manufacturing: The Influence of Tariffs and Concentration," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 7(4), pages 594-610, November.
    7. Stanley W. Kardasz & Kenneth R. Stollery, 2001. "Exchange rate pass-through and its determinants in Canadian manufacturing industries," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 34(3), pages 719-738, August.
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