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Lost in Transit: Product Replacement Bias and Pricing to Market

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Author Info
Emi Nakamura
Jón Steinsson

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Abstract

Product replacement is frequent in the micro-data that underlie U.S. import and export price indices, while price changes are infrequent. Consequently, over 40% of price series in the data have no price changes and roughly 70% have two price changes or less. In constructing price indices, price adjustments that occur at the time of product replacements tend to be dropped. If price adjustments disproportionately occur at the time of product replacements then price adjustments are disproportionately unobserved. We show that this \product replacement bias" may distort the measured long-run relationship between import and export prices and the exchange rate by a factor of between 1.7 and 2.2. Accounting for this bias, we find that the price of non-oil U.S. imports (relative to domestic consumption) responds by 0.6-0.7% for each 1% change in the U.S. real exchange rate, while the price of U.S. exports (relative to foreign consumption) responds by roughly 0.8%. This contrasts with conventional pass-through estimates of 0.2-0.4% for non-oil import prices and 0.9% for export prices. Thus, we find that the degree of pricing to market for U.S. imports and exports is more symmetric and the degree of pricing to market for U.S. imports more moderate than conventional measures suggest. Adjusting for product replacement bias also substantially raises the volatility of the terms of trade. These results improve the fit of the data to standard models.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15359.

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Date of creation: Sep 2009
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Handle: RePEc:nbr:nberwo:15359

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Find related papers by JEL classification:
C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Microeconomic Data
E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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