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Pass-Through of Exchange Rates to Consumption Prices: What Has Changed and Why?

In: International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy (NBER-EASE Volume 17)

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  • Jose Manuel Campa
  • Linda S. Goldberg

Abstract

In this paper, we use cross-county and time series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods, as well as to non-traded goods. We highlight three reasons for changing pass through at the level of retail prices of goods. First, pass through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors. This means that the costs of imported goods as well as home tradable goods have heightened sensitivity to import prices and exchange rates. The final channel we consider is whether there have been changing sector expenditures on distribution services, with the direction of change negatively correlated with pass through into final consumption prices. We find that this channel, which has been a means of insulating consumption prices from import content and exchange rates, has not systematically changed in recent years. The balance of effects weighs in favor of increased sensitivity of consumption prices to exchange rates, even if exchange-rate pass-through into import prices has declined for some types of goods.

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This chapter was published in:

  • Takatoshi Ito & Andrew K. Rose, 2008. "International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy (NBER-EASE Volume 17)," NBER Books, National Bureau of Economic Research, Inc, number ito_08-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6982.

    Handle: RePEc:nbr:nberch:6982

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    1. Goldberg, Linda S. & Campa, Jose M., 2006. "Distribution margins, imported inputs, and the insensitivity of the CPI to exchange rates," IESE Research Papers, IESE Business School D/625, IESE Business School.
    2. Goldberg, Pinelopi Koujianou & Verboven, Frank, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(4), pages 811-48, October.
    3. Jane E. Ihrig & Mario Marazzi & Alexander D. Rothenberg, 2006. "Exchange-rate pass-through in the G-7 countries," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 851, Board of Governors of the Federal Reserve System (U.S.).
    4. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers, University of California, Davis, Department of Economics 986, University of California, Davis, Department of Economics.
    5. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 704, Board of Governors of the Federal Reserve System (U.S.).
    6. Frankel, Jeffrey A. & Wei, Shang-jin & Parsley, David, 2012. "Slow Pass-through Around the World: A New Import for Developing Countries?," Scholarly Articles 10494212, Harvard Kennedy School of Government.
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    8. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, Elsevier, vol. 48(1), pages 7-35, June.
    9. Campa, José Manuel & Goldberg, Linda S, 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4391, C.E.P.R. Discussion Papers.
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    11. Bacchetta, Philippe & van Wincoop, Eric, 2003. "Why do Consumer Prices React Less than Import Prices to Exchange Rates?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3702, C.E.P.R. Discussion Papers.
    12. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
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    15. Christopher Gust & Sylvain Leduc & Nathan Sheets, 2008. "The adjustment of global external balances: does partial exchange rate pass-through to trade prices matter?," Working Paper Series, Federal Reserve Bank of San Francisco 2008-16, Federal Reserve Bank of San Francisco.
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    21. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18.
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    Cited by:
    1. Baki Demirel & Baris Alpaslan & Emre Guneser Bozdag, 2013. "Do Exchange Rates Affect Inflation? Evidence from Emerging Market Economies," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1318, Koc University-TUSIAD Economic Research Forum.
    2. Li-gang Liu & Andrew Tsang, 2008. "Exchange Rate Pass-Through to Domestic Inflation in Hong Kong," Working Papers 0802, Hong Kong Monetary Authority.
    3. Bonnet, Céline & Réquillart, Vincent, 2013. "Tax incidence with strategic firms in the soft drink market," Journal of Public Economics, Elsevier, Elsevier, vol. 106(C), pages 77-88.
    4. Antonio Forte, 2009. "The pass-through effect: a twofold analysis," EERI Research Paper Series EERI_RP_2009_08, Economics and Econometrics Research Institute (EERI), Brussels.
    5. Martin D. D. Evans, 2012. "Exchange-Rate Dark Matter," IMF Working Papers 12/66, International Monetary Fund.
    6. Airaudo, Marco & Zanna, Luis-Felipe, 2012. "Interest rate rules, endogenous cycles, and chaotic dynamics in open economies," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(10), pages 1566-1584.
    7. Garcia-Cebro, Juan A. & Varela-Santamaría, Ramón, 2011. "The international transmission of monetary shocks across developed countries: The role of imported raw materials," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(8), pages 1791-1813.
    8. Till Dannewald & Lutz Hildebrandt, 2008. "A Brand Specific Investigation of International Cost Shock Threats on Price and Margin with a Manufacturer-Wholesaler-Retailer Model," SFB 649 Discussion Papers SFB649DP2008-070, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    9. Delatte, Anne-Laure & López-Villavicencio, Antonia, 2012. "Asymmetric exchange rate pass-through: Evidence from major countries," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(3), pages 833-844.
    10. Jinbin Wang & Nan Li, 2010. "Exchange rate pass-through: The case of China," Frontiers of Economics in China, Springer, Springer, vol. 5(3), pages 356-374, September.
    11. Paul R. Bergin & Robert C. Feenstra, 2007. "Pass-through of Exchange Rates and Competition Between Floaters and Fixers," NBER Working Papers 13620, National Bureau of Economic Research, Inc.
    12. Zhao, Huan & Xiaodong, Du & Hennessy, David A., 2011. "Pass-Through in United States Beef Cattle Prices: A Test of Ricardian Rent Theory," Staff General Research Papers 32095, Iowa State University, Department of Economics.
    13. Andrés González & Hernán Rincón & Norberto Rodríguez, . "La transmisión de los choques a la tasa de cambio sobre la inflación de los bienes importados en presencia de asimetrías," Borradores de Economia 532, Banco de la Republica de Colombia.
    14. Kerstin Stahn, 2011. "Changes in Import Pricing Behaviour: Evidence for Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 231(4), pages 522-545, August.
    15. Andrés González & Hernán Rincóm & Norberto Rodríguez, 2008. "La transmisión de los choques a la tasa de cambio sobre la inflación," BORRADORES DE ECONOMIA 005089, BANCO DE LA REPÚBLICA.
    16. repec:got:cegedp:133 is not listed on IDEAS
    17. Jiang, Jiadan & Kim, David, 2013. "Exchange rate pass-through to inflation in China," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 900-912.
    18. Berner, Eike & Birg, Laura, 2012. "Retailers and Consumers: The pass-through of import price changes," Center for European, Governance and Economic Development Research Discussion Papers 133, University of Goettingen, Department of Economics.
    19. Stahn, Kerstin, 2009. "Changes in import pricing behaviour: the case of Germany," Discussion Paper Series 1: Economic Studies 2009,14, Deutsche Bundesbank, Research Centre.

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