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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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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 7 (December)
Pages: 3277-3316

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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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Citations

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Cited by:
  1. Raphael A. Auer, 2012. "Exchange Rate Pass-Through, Domestic Competition, and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi," CESifo Working Paper Series 3759, CESifo Group Munich.
  2. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.
  3. Benjamin Mandel, 2011. "The dynamics and differentiation of Latin American metal exports," Staff Reports 508, Federal Reserve Bank of New York.
  4. Berardi, N. & Gautier, E. & Le Bihan, H., 2013. "More Facts about Prices: France Before and During the Great Recession," Working papers 425, Banque de France.
  5. Cook, Jonathan Aaron, 2014. "The effect of firm-level productivity on exchange rate pass-through," Economics Letters, Elsevier, vol. 122(1), pages 27-30.
  6. Susan Houseman & Christopher Kurz & Paul Lengermann & Benjamin Mandel, 2010. "Offshoring bias in U.S. manufacturing: implications for productivity and value added," International Finance Discussion Papers 1007, Board of Governors of the Federal Reserve System (U.S.).
  7. Beatriz de Blas & Katheryn Niles Russ, 2010. "Teams of rivals: endogenous markups in a Ricardian world," Globalization and Monetary Policy Institute Working Paper 67, Federal Reserve Bank of Dallas.
  8. De Graeve, Ferre & Walentin, Karl, 2011. "Refining Stylized Facts from Factor Models of Inflation," Working Paper Series 254, Sveriges Riksbank (Central Bank of Sweden), revised 01 Oct 2013.
  9. Ma, Debin & Yuan, Weipeng, 2013. "Discovering Chinese Economic History from Footnotes: the Living Tale of a Private Merchant Archive (1800-1850)," CAGE Online Working Paper Series 164, Competitive Advantage in the Global Economy (CAGE).
  10. Haroon Mumtaz & Özlem Oomen & Jian Wang, 2011. "Exchange rate pass-through into U.K. import prices: evidence from disaggregated data," Staff Papers, Federal Reserve Bank of Dallas, issue June.
  11. Beatriz de Blas & Katheryn Russ, 2010. "Understanding Markups in the Open Economy under Bertrand Competition," NBER Working Papers 16587, National Bureau of Economic Research, Inc.
  12. Mina Kim, & Deokwoo Nam, & Jian Wang & Jason Wu,, 2013. "International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on US-China Trade," Working Papers 467, U.S. Bureau of Labor Statistics.

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