Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/80732
Authors: 
Cao, Shutao
Dong, Wei
Tomlin, Ben
Year of Publication: 
2012
Series/Report no.: 
Bank of Canada Working Paper 2012-20
Abstract: 
This 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.
Subjects: 
Exchange rates
Inflation and prices
Market structure and pricing
JEL: 
F31
F41
E30
L11
Document Type: 
Working Paper

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