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Lost in Transit: Product Replacement Bias and Pricing to Market

  • Emi Nakamura
  • Jón Steinsson

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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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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