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Has exchange rate pass-through really declined? Evidence from Canada

  • Bouakez, Hafedh
  • Rebei, Nooman

Several empirical studies suggest that exchange rate pass-through has declined in recent years among industrialized countries. Results for Canada also indicate that import and consumer prices have become less responsive to exchange-rate movements in the 1990s. These findings are based on reduced-form regressions that are typically motivated by partial-equilibrium models of pricing. This paper uses instead a structural, general-equilibrium approach to test the premise that exchange rate pass-through has decreased in Canada. Our approach consists in estimating a dynamic stochastic general-equilibrium model for Canada over two sub-samples, which cover the periods before and after the adoption of inflation targeting by the Bank of Canada. We then use impulse-response analysis to assess the stability of exchange rate pass-through across the two sub-samples. Our results indicate that pass-through to Canadian import prices has been rather stable, while pass-through to Canadian consumer prices has declined in recent years. Counterfactual experiments reveal that the change in monetary policy regime is largely responsible for this decline.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 75 (2008)
Issue (Month): 2 (July)
Pages: 249-267

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Handle: RePEc:eee:inecon:v:75:y:2008:i:2:p:249-267
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  1. Steve Ambler & Ali Dib & Nooman Rebei, 2004. "Optimal Taylor Rules in an Estimated Model of a Small Open Economy," Staff Working Papers 04-36, Bank of Canada.
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  3. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange rate pass-through into import prices: a macro or micro phenomenon?," Staff Reports 149, Federal Reserve Bank of New York.
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