less sensitive to exchange rate movements in the short run because producers are reluctant to adjust prices unless they are sure the exchange rate changes are going to persist. efforts to identify and quantify the effects of erpt in canada have faced an additional challenge, however, one that is beyond the countercyclical influence of monetary policy. until recently, the absence of a reliable data series for most import prices meant that researchers had to use the cpi to test for erpt. but, as already noted, the pass - through effects onto the cpi are likely to be quite muted. although evidence could be found of near - complete pass - through of exchange rate changes into the prices of homogeneous and widely traded goods such as oil and other primary commodities, evidence for highly differentiated manufactured goods and speciality products was hard to find. another result common to many macro studies was a noticeable declining trend in erpt over time. the increasing adoption of inflation - targeting frameworks by both advanced and emerging - market economies may explain this phenomenon, along with the growing importance of differentiated manufacturing goods relative to raw materials in global trade. several other explanations have also been put forward for weak and declining estimates of erpt, but unfortunately there isn ’ t time to discuss them here. the bottom line, in any event, is that, although the estimated macroeconomic effects might not appear to be very large, exchange rate pass - through does exist and is operating in a predictable, helpful, way. bis central bankers ’ speeches more convincing microeconomic evidence of erpt happily, much stronger and more convincing results have recently become available by taking a micro approach. researchers using rich micro databases have been able to analyze detailed information on individual commercial transactions and can now test for erpt at the level of individual firms and products. this micro approach means researchers can overcome the problems associated with endogeneity and heterogeneity in the earlier macro studies. bringing it down to the level of the firm and specific transactions provides a clearer picture and allows a more sensible pattern to emerge. several such studies have recently been completed by my colleagues at the bank, and others are in progress. what i would like to do in this, the concluding section of my talk, is give you a quick overview of some key results from two of these studies. the first study uses data from the canadian border services agency on every single shipment of apparel imported into canada between july 2002 and august 2008 – more than 6. 5 million transactions. 4 early results from this study show

exchange rates and exchange rates affect i. ramzi, r. lafrance and j. murray, “ the turning black tide : energy prices and the canadian dollar, ” canadian journal of economics 41, 3 ( 2008 ) : 737 – 59. bis central bankers ’ speeches prices. these variables are not only connected, but more importantly, they move in the desired direction. at times, however, it is not easy to observe them. most of the early empirical work in this area looked at broad macroeconomic variables for evidence of ppp and erpt. for the erpt tests, this typically involved running simple reduced - form equations. a price index, such as the cpi, or a broad measure of import prices ( denominated in the currency of the importer ), would be put on the left - hand side of the equation, as a dependent variable, with the exchange rate and other control variables on the right - hand side, as explanatory variables. using this formula, researchers expected to observe a coefficient on the exchange rate somewhere between zero and 1. a value of 1 would represent complete pass - through, while a value of zero would indicate no pass - through. since the conditions necessary for complete pass - through, such as perfect competition and the absence of any trade barriers or other economic frictions, were unlikely to be satisfied, something between these two extremes was anticipated. in practice, researchers found that, for most countries, the pass - through coefficient was extremely small. this was especially true in the short run, since prices take time to adjust. imported products, and the domestic goods and services that compete with them, were usually found to be more sensitive to exchange rate movements. for this reason, one would expect to see a stronger relationship when looking at import prices alone as opposed to the entire cpi. even here, however, the evidence was often relatively weak. there are a number of possible explanations for this. first, the estimated coefficients were likely biased towards zero because of econometric problems that arise whenever one uses a simple reduced - form equation to estimate a relationship that is inherently endogenous. since prices and the exchange rate are believed to influence each other ’ s behaviour, an obvious simultaneity bias exists. second, it is also possible that effective countercyclical monetary policy and the adoption of an explicit inflation target in countries such as canada have made it harder to observe erpt. some researchers have argued that a credible inflation target makes prices