Exchange rate pass-through and its determinants in Canadian manufacturing industries

In this paper the pass-through of exchange rate changes into the real prices of domestically produced and imported goods in Canadian manufacturing industries is examined through industry estimates of the pass-through elasticities and a cross-section analysis of their determinants. We find that the domestic pass-through elasticity increases with the effect of the exchange rate on domestic costs of production, the export share, the elasticity of substitution between imports and domestic goods, and the domestic advertising intensity. The import elasticity increases with the elasticity of substitution and the rate of price protection and decreases with advertising intensity. JEL Classification: L60, F14
Les effets de changements dans le taux de change sur les prix réels dans les industries manufacturières canadiennes. Ce mémoire examine les effets des changements dans le taux de change sur les prix réels des biens produits au Canada ou importés pour les industries manufacturières canadiennes en construisant des estimés par secteur des élasticités de transfert et en examinant leurs déterminants dans une analyse trasnversale. On montre que l'élasticité de transfert domestique s'accroît à proportion que l'effet du taux de change sur les coûts internes de production, la part des exportations, l'élasticité de substitution entre importations et biens domestiques, et l'intensité de publicité au plan interne sont importants. L'élasticité des importations s'accroît avec l'élasticité de substitution et le taux de protection des prix, et décroît avec le niveau d'intensité de la publicité.     

Exchange rate pass-through and inflation targeting in Peru

It has been widely documented that the exchange rate pass-through to domestic inflation has decreased significantly in most of the industrialized world. As microeconomic factors cannot completely explain such a widespread phenomenon, a macroeconomic explanation linked to the inflationary environment—that a low and more stable inflation rate leads to a decrease in the pass-through—has gained popularity. Using a structural VAR framework, this paper presents evidence of a similar decline in the pass-through in Peru, a small open economy that gradually reduced inflation to international levels in order to adopt a fully fledged inflation targeting scheme in 2002. It is argued that the establishment of a credible regime of low inflation has been instrumental in driving the exchange rate pass-through down.     

Exchange rate pass-through: The case of China

This paper studies the degree of the exchange rate pass-through (ERPT) to import and consumer prices in China with both the ratio of China’s imports to GDP and domestic prices of China’s main trade partners going up. Statistic results show that the degree of ERPT is somehow less than the degree of marginal cost plus mark-up pass-through of exporters, and econometric analyses reach the same conclusion. Besides, the ERPT to import prices is found to be high while the ERPT to CPI is low owing to some factors that obstruct the import prices pass-through channel to domestic CPI. But this situation has been changing significantly since August 2005. Thus, a more flexible exchange rate system is needed for China to absorb the price shock from aboard efficiently.     

Exchange rate fluctuations and labour market adjustments in Canadian manufacturing industries

We estimate the link between exchange rate fluctuations and the labour input of Canadian manufacturing industries. The analysis is based on a dynamic model of labour demand and the econometric strategy employs a panel two‐step approach for cointegrating regressions. Our data are drawn from a panel of 20 manufacturing industries from the KLEMS database and cover a long sample period that includes all cycles of appreciation and depreciation of the Canadian dollar over the last 50 years. Our results indicate that exchange rate fluctuations have significant long‐term effects on the labour input of Canada's manufacturing industries, especially for trade‐oriented industries, but that these long‐term impacts materialize very gradually following shocks.     

Exchange rate pass-through in deflation: The case of Taiwan

This paper incorporates deflation in an analysis of the relationship between the exchange rate pass-through and inflation. Using a nonlinear model based on monthly data of Taiwan's import prices from 1981 to 2008, we find that the degree of exchange rate pass-through is increasing in deflation. The increase becomes smaller when the price of oil is excluded. Evidence for pass-through increasing in deflation has not previously been found in the existing literature and presents a new understanding of the pricing behavior of firms. Poor profits in deflation cause firms to pass through most of the cost of exchange rate changes to their products to avoid exiting the market.     

Exchange rate pass-through in Turkish export and import prices

This article investigates the effects of horizontal acquisitions on the performance of target firms in the 1990s. Using French manufacturing firm-level data, we examine two main indicators of performance: the profit and the productive efficiency. We distinguish domestic from cross-border acquisitions. To evaluate the impact of take-overs, we implement appropriate difference-in-difference estimation techniques associated to a matching propensity score procedure. We find that Mergers &?Acquisitions (M&A) do not increase the profit of French target firms, even on the long run. However, they clearly raise the productivity of target firms. These results suggest that firms probably redistribute efficiency gains at the upstream and/or downstream production stage. There is no evidence of an increase in market power. In addition, the consequences of domestic and cross-border M&A significantly differ. Efficiency gains are stronger for cross-border M&A. This conclusion is however true only for extra-European Union operations. The achievement in the European economic integration certainly explains the absence of difference between European and domestic acquisitions. Finally, our results cast some doubt on the frequent discrimination attitude towards foreign takeovers and the fears of their impact on firms’ performance and the host country's welfare.     

Exchange rate pass-through, menu costs and threshold cointegration

This paper investigates exchange rate pass-through (ERPT) in the presence of menu costs. Assuming exports prices are negotiated in the exporter’s currency, menu costs give rise to two thresholds around (within) which incomplete ERPT is (not) observed. An error correcting process is triggered from a deviation in the ERPT cointegrating relation only when the deviation is large enough in absolute value to fall outside of a band defined by symmetric thresholds. Threshold autoregressive (TAR) cointegration techniques are used to investigate Quebec and Ontario pork meat export prices in the US and Japanese markets. Through Monte Carlo simulations, we find that our Equilibrium-TAR tests have greater power than a standard unit root test. Our empirical application suggests that Canadian pork exporters exercise market power in the US market. The evidence of incomplete ERPT in the Japanese market is weaker and differs across provinces. Evidence of thresholds is reported for both destinations, thus indicating the existence of significant menu costs for Canadian pork exporters in these markets.     

Exchange rate pass-through in a small open economy: the Anglo-Irish case

Bilateral import unit values are constructed to investigate the extent and speed of exchange rate and production cost pass-through into the unit values of Irish imports (total and sectoral) from the UK using Menon's (1996 Menon, J. 1996. The degree and determinants of exchange rate pass-through: market structure, non-tariff barriers and multinational corporations. Economic Journal, 106(435): 434–44.  ) mark-up model. The approach used to measure exchange rate pass-through is based on cointegration and error-correction modelling and the period of analysis is from 1979 to 1995. Full pass-through from the bilateral Irish pound–Sterling exchange rate and from UK producer costs could not be rejected for total and sectoral import unit values for the sample period 1979q1–1995q4. This implies no role for domestic competing prices in explaining the long-run relationship determining unit values of Irish imports from the UK. The results indicate that for aggregate and sectoral unit values of Irish imports from the UK pass-through is incomplete in the short-run.     

Exchange rate pass-through in New Member States and candidate countries of the EU

This paper studies the degree of exchange rate pass-through to the prices of imports of some New Member States (NMSs) of the European Union plus Turkey, coming from the euro area. I estimate industry-specific rates of pass-through across and within countries using the methodology proposed by Campa and González-Mínguez [Campa, J.M. and González-Mínguez, J.M. (2006). Differences in Exchange Rate Pass-Through in the Euro Area. European Economic Review, 50, 121–145.] which estimates the short- and long-run pass-through elasticities. I did not find evidence either in favour of the hypothesis of Local Currency Pricing (zero pass-through) or the hypothesis of Producer Currency Pricing (complete pass-through) for all the countries except for Slovenia and Cyprus. With reference to the results by industry, the lowest values for exchange rate pass-through are in Manufacturing sectors. However, I did observe a exchange rate pass-through decline through the pricing chain.     

Exchange rate pass-through,price discrimination,and US meat export prices

Exports are becoming increasingly important for US livestock and poultry producers. Consequently, meat industry participants are concerned about the potential impacts of variations in relative currency values. These effects are considered by quantifying the impacts of relative exchange rates on US beef, pork and poultry export prices. In addition, the impacts of GATT and NAFTA agreements on exchange rate pass-through are considered. The results indicate incomplete exchange rate pass-through occurs for several countries. Trade liberalization under GATT has positively influenced US beef and poultry export prices.     

Exchange rate pass-through in the U.S. market: A cross-country and cross-product investigation

Foreign exporters in general and Japanese exporters in particular have been observed to price to market in the U.S. Are there significant differences in the pricing behavior among exporters from different countries? Is the Japanese export pricing behavior unique? This paper addresses these questions and finds that while there is obvious variation in exchange rate pass-through among products, which relates significantly to the degree of product differentiation, no single exporter to the United States is unique in their pricing behavior.     

Exchange rate pass-through in the U.S. automobile market: A cointegration approach

This study analyzes exchange rate pass-through in the presence of monopolistic competition in the U.S. automobile market. Using cointegration techniques, we investigate how foreign competing firms' prices interact following an exchange rate-shock. The results generally indicate price interdependence (competition) among the rival firms. In one case where we did not find any price interdependence, the extent of exchange rate pass-through was higher. This validates the economic intuition that a low degree of price competition corresponds with a high degree of exchange rate pass-through.     

Exchange rate pass-through to domestic producer prices: Evidence from Korean firm-level pricing survey

This note studies exchange rate pass-through to the prices of domestically produced goods, exploring the firm-level pricing survey conducted by the Bank of Korea. The data reveal the imported inputs channel of, as well as nonlinear and asymmetric, exchange rate-pass-through.     

Carbon tax pass-through in Canadian retail gasoline markets

A carbon tax's pass-through is one factor influencing its effectiveness in internalizing the externality created by greenhouse gas emissions. This paper measures the pass-through of carbon taxes introduced in retail gasoline markets of four Canadian provinces that did not meet the carbon pollution pricing federal benchmark stringency requirements. Those four provinces are Saskatchewan, Manitoba, Ontario and New Brunswick. Using daily retail gasoline prices for 40 treated cities and nine control cities we find the pass-through rates are city-specific and vary from 0% to over 140%. City-specific pass-through rates imply that estimations at a higher level of geographical aggregation assume homogeneous effects where heterogeneous effects might be present. Our results also suggest it would be difficult for a government to impose an optimal and nationwide carbon tax on automotive greenhouse gas emissions. Although the degree of competition can explain city-specific pass-through rates, it cannot explain over-shifting. Over-shifting can be explained, however, by the demand functional form.     

Market power and exchange rate pass-through

In this paper we provide new empirical evidence on the relationship between market power, as measured by market share, and incomplete exchange rate pass-through. The role of market power is examined in the context of a Cournot model, which is estimated with data relating to Japan's presence in the US market. To test for the existence of possible aggregation biases due to sectoral heterogeneity, estimations are carried out on time series data for the total economy and the manufacturing sector and on panel data for five manufacturing industries at the three-digit level of classification, using the Johansen multivariate cointegration technique and the recently developed by [Larsson, R., Lyhagen, J., & Lothgren, M. (2001). Likelihood-based cointegration tests in heterogeneous panels. Econometrics Journal, 4, 109–142] multivariate panel cointegration technique. Hypotheses about the degree of pass-through are tested as restrictions on estimated equilibrium pricing equations and robustness tests are performed. The empirical results indicate that Japanese firms have market power and this validates the use of an imperfect competition model. However, it appears that market power is not the only element on which to base the analysis of the incomplete exchange rate pass-through by Japanese firms.     

Understanding changes in exchange rate pass-through

Recent research suggests that there has been a decline in the extent to which firms “pass-through” changes in exchange rates to prices. This paper provides further evidence in support of this claim. Additionally, it proposes an explanation for this phenomenon. The paper then presents empirical evidence of a structural break during the 1990s in the relationship between the real exchange rate and CPI inflation for a set of fourteen OECD countries. It is suggested that the recent reduction in the real exchange rate pass-through can in part be attributed to the low inflationary environment of the 1990s.     

State space models for the exchange rate pass-through: determinants and null/full pass-through hypotheses

In this article, we formulate linear Gaussian state space models for the estimation of the exchange rate pass-through of the Brazilian Real against the US Dollar, using monthly data from August 1999 to August 2008. The state space/Kalman filtering framework allows the investigation of some empirical aspects previously suggested in the literature, such as time-varying coefficients and null/full pass-through hypotheses. We also test whether some theoretical ‘determinants’ of the pass-through are statistically significant in the period considered. The principal findings are as follows: (1) the data offer strong support to a time-varying pass-through; and (2) the variance of the exchange rate pass-through, the monetary policy and the trade flow have shown to be relevant determinants of the exchange rate pass-through.     

Nonlinear exchange rate pass-through in industrial economies

This article presents theoretical arguments for a nonlinear pass-through relationship for import and export prices and investigates the relationship empirically. The theoretical argument is based on the menu-cost approach in which small absolute changes in exchange rates may not prompt price changes because the costs of doing so exceed the extra profits generated for firms involved in international trade. This relationship is investigated empirically using quarterly data for the period 1979q1-2015q1 for a sample of 17 countries. In the case of import prices, evidence is found of nonlinear adjustment consistent with the theoretical model in 4 out of 17 cases. In the case of export prices, such a relationship is only evident for two economies in the sample. However, for both the import and export price cases, a significant positive nonlinear relationship is found for the two largest economies in the sample, i.e. the United States and Japan.