Contrary to conventional wisdom, the C$ isn’t really doing much to help the Bank of Canada restrain inflation, TD Bank economists say in a special report.

“There has been much talk about the ability of the stronger C$ to augment the actions of the Bank of Canada in its fight against the elevated inflationary pressures that currently exist in the Canadian economy,” TD says. “This assertion, however, appears to be at odds with the empirical evidence.”

“The current evidence points to a diminished role for the stronger dollar, as the pass-through of changes in the C$ to domestic consumer prices has fallen significantly over the past decade or so,” it says.

TD argues that, “contrary to popular beliefs and standard economic theory, the empirical evidence on the dampening impact of the strengthening dollar on consumer prices is limited at best, and in fact, in some cases (depending on the model estimated) the appreciating C$ could be associated with higher core consumer prices – especially in the long run.”

“The empirical evidence clearly demonstrates that changes in the C$ over the past years have had little (statistically significant) impact on the core consumer price inflation rate in Canada,” TD concludes. “While this contrasts starkly with much of the theoretical literature and the historical estimates, it is not unique in any way to the evidence for other countries.”

“What this certainly means is that the anticipated dampening effect of the strong C$ on consumer prices is not empirically supported, and as such, the Bank of Canada should expect to receive little help from the stronger C$ in its effort to remove the existing inflationary pressures in the Canadian economy,” it adds.

“As such, the evidence gives credence to the view that some further monetary policy response in the future from the Bank of Canada to address the current inflationary pressures may be necessary, independent of any changes on the part of the C$.”