This paper studies the pass-through of changes in exchange rates to prices in small, open, commodity-exporting economies, taking Canada as a case study. Our econometric setup estimates pass-through, conditional on shocks to the international demand for oil and all industrial commodities. Our measure is free from endogeneity concerns between prices and exchange rates, thus improving upon the standard estimates in the literature.
Our pass-through measure, which is free from endogeneity concerns between prices and exchange rates, leads in some cases to an opposite inference in reference to the sign of the pass-through compared with standard estimates. By focusing on industry-level producer price indices, we show that conditional pass-through decreases with industry market power, while it increases with the degree of import penetration and the persistence of industry-specific shocks.
