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Lost in Transit: Product Replacement Bias and Pricing to Market

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  • Emi Nakamura
  • Jón Steinsson

Abstract

In the microdata underlying US trade price indexes, 40 percent of products are replaced before a single price change is observed and 70 percent are replaced after two price changes or fewer. A price index that focuses on price changes for identical items may, therefore, miss an important component of price adjustment occurring at the time of product replacements. We provide a model of this "product replacement bias" and quantify its importance using US data. Accounting for product replacement bias, long-run exchange rate "pass-through" is substantially higher than conventional estimates suggest, and the terms of trade are substantially more volatile. (JEL F14, F31)

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  • Emi Nakamura & Jón Steinsson, 2012. "Lost in Transit: Product Replacement Bias and Pricing to Market," American Economic Review, American Economic Association, vol. 102(7), pages 3277-3316, December.
    • Handle: RePEc:aea:aecrev:v:102:y:2012:i:7:p:3277-3316
    Note: DOI: 10.1257/aer.102.7.3277
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    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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    1. Lost in Transit: Product Replacement Bias and Pricing to Market (AER 2012) in ReplicationWiki

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