The Industry Determinants of Exchange Rate Pass-Through into Canadian Producer Prices

Abstract

This paper models and estimates exchange rate pass-through and its determinants in Canadian manufacturing industries. The paper predicts theoretically that the exchange rate pass-through should be between one and zero, where it is positively affected by the share of tradable inputs in production costs and the domestic firms’ market share, and negatively by the elasticity of marginal cost with respect to output. The sign for the degree of product differentiation is not theoretically clear. Results of estimation indicate that pass-through is incomplete and is mostly affected by the share of tradable inputs in production costs (positively) and the elasticity of marginal cost with respect to output (negatively).