We develop a mannequin with agency heterogeneity in importing and cross-border procuring amongst shoppers. Change-rate appreciations decrease the price of imported items, but in addition result in extra cross-border procuring; therefore, the web affect on combination retail costs and gross sales is ambiguous. Utilizing Canadian firm-level information from 2002 to 2012, we discover empirical help for a number of predictions of the mannequin. We then estimate the model-implied exchange-rate elasticities of combination retail costs and gross sales. Our benchmark outcomes point out a deflationary impact of appreciations on retail costs and a small optimistic impact on gross sales. From 2002 to 2012, the Canadian change charge appreciated by 57%, which, in line with our mannequin, led to a 6.5% discount within the retail worth index. We additionally discover that the estimated elasticities of combination retail costs and gross sales grew over this era, pushed by import development from China. This means that the transmission of exchange-rate actions to costs has grown because the early 2000s, which has penalties for the function of Canada’s versatile change charge regime in supporting inflation stability.
See additionally: Supplementary Material