Has exchange rate pass-through really declined? Evidence from Canada |
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Authors: | Hafedh Bouakez Nooman Rebei |
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Institution: | a Institute of Applied Economics and CIRPÉE, HEC Montréal, 3000 chemin de la Côte-Sainte-Catherine, Montréal, Québec, Canada H3T 2A7 b Research Department, Bank of Canada, 234 Wellington St., Ottawa, Ontario, Canada K1A OG9 |
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Abstract: | 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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Keywords: | Exchange rate pass-through General equilibrium Maximum-likelihood estimation |
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