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Exchange rates and the prices of manufacturing products imported into the United States

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  • Giovanni P. Olivei

Abstract

Local-currency prices of foreign products do not usually respond one-for-one to changes in the exchange rate. The extent and pervasiveness of this incomplete "pass-through" of exchange rates to import prices has long been debated. Yet, despite the abundance of empirical research on the relationship between exchange rates and import prices, there is little systematic evidence on the time-series dimension of pass-through that encompasses the most recent years. ; In this article, the author provides some updated estimates of the responsiveness of U.S. import prices to changes in the exchange rate in a sample of manufacturing industries over the period 1981 to 1999. Passthrough is generally incomplete, but there is a considerable degree of variation across different industries. The author also documents a decline in pass-through for the majority of examined industries in the most recent decade. While pass-through was 0.50 on average in the 1980s, it dropped to an average of about 0.25 in the 1990s. Thus, during the 1990s larger changes in the exchange rate were needed to move the dollar price of imported goods relative to the price of domestic goods. As with other studies, the author finds that it is difficult to relate the change in passthrough to macroeconomic outcomes such as the lower inflation rates achieved in many countries.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (2002)
Issue (Month): Q 1 ()
Pages: 3 - 18

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Handle: RePEc:fip:fedbne:y:2002:i:q1:p:3-18

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Keywords: Foreign exchange ; Prices ; Imports;

References

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  1. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-54, September.
  2. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  4. Campa, José Manuel & Goldberg, Linda S, 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers 4391, C.E.P.R. Discussion Papers.
  5. Feenstra, Robert C., 1989. "Symmetric pass-through of tariffs and exchange rates under imperfect competition: An empirical test," Journal of International Economics, Elsevier, vol. 27(1-2), pages 25-45, August.
  6. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
  7. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  8. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
  9. Robert W. Rich & Donald Rissmiller, 2000. "Understanding the recent behavior of U.S. inflation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Jul).
  10. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.).
  11. Subramanian Rangan & Robert Z. Lawrence, 1999. "Search and Deliberation in International Exchange: Learning from Multinational Trade About Lags, Distance Effects, and Home Bias," NBER Working Papers 7012, National Bureau of Economic Research, Inc.
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