Exchange Rate Pass-Through to Provincial Consumer Prices: A Geographical-Goods Level Analysis

This study investigates exchange rate pass-through (ERPT) to provincial consumer prices in Canada from a geographical and goods-specific perspective. ERPT refers to the extent in which changes in the exchange rate influence domestic price movements. For example, a depreciation of the Canadian dollar relative to the U.S. dollar may increase the price of imports into Canada from the U.S., thereby raising consumer prices in Canada. Using extensive datasets from 2000 to 2023, this research quantifies the magnitude and speed of ERPT across various provinces and consumer price index (CPI) categories. The methodology employs a regression model framework, building upon the approach of Savoie-Chabot and Khan (2015) to estimate the impact of short-run and long-run exchange rate fluctuations on consumer prices. The findings highlight significant regional and categorical variation in ERPT. For example, Alberta exhibits the highest short-run ERPT for energy consumer prices where a 1% increase in the exchange rate leads to a 0.60% increase in prices. In contrast, Quebec exhibits the lowest short-run ERPT for energy consumer prices where a 1% increase in the exchange rate leads to only a 0.18% increase in prices. Price responses in each of these provinces differs from the short-run ERPT of Canada which is 0.32%. Furthermore, energy prices exhibit the highest sensitivity to exchange rate fluctuations, while most often categories excluding energy show minimal impact. These results emphasize the importance of region-specific economic policies to address distinct provincial price responses to exchange rate fluctuations. This study offers valuable insights for policymakers to develop strategies that mitigate any adverse economic effects of exchange rate changes and promote regional economic stability and growth.