Exchange Rates, Product Variety, and Substitution in U.S. Scanner Data

This paper is the first to combine U.S. retail scanner data with barcode-level data on country of origin. We use this novel dataset for 10 narrow product categories from 2001 to 2012 to study several related questions. First, we estimate exchange rate pass-through into the relative CES price index of foreign retail products to be about -0.25 for the median product category. Consistent with the strong positive correlation between the number of foreign products and the dollar that we document, we estimate that exchange rate pass-through is about half the previous magnitude when entry/exit effects are excluded from the price index. Further, our results using a structural demand system provide clear evidence that the macro elasticity of substitution (between U.S. and foreign goods) is significantly smaller than the micro elasticity (within U.S. and foreign goods) for essentially all product categories. Finally, we find little evidence of income-induced expenditure switching.