Exchange Rate Cycles and Canada - U.S. Manufacturing Prices

Abstract

During the post-1970 period, Canadian manufacturing prices have alternately increased and fallen relative to U.S. prices - just the reverse of the cycle in the Canada - U.S. exchange rate. But not all manufacturing industries have experienced the same amplitude of relative price changes. This paper examines the industry characteristics that are related to the shifts in competitiveness, measured as the relative price ratio between Canadian prices and U.S. prices adjusted by the exchange rate. We find that relative factor input costs and relative productivity growth are the two most important factors influencing changes in relative Canada - U.S. prices. Competitive pressures emanating from trade are important determinants of the extent to which relative productivity differences are passed through to cross-country relative prices in the manufacturing sector. We also find that the magnitude of domestic market competition and export intensity affects the short-run relative price shifts over the cycle of exchange rate.

Keywords: exchange rate, real exchange rate, prices, international competitiveness, productivity

JEL Classification: E30, F31, L60, D24