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Distribution margins, imported inputs, and the insensitivity of the CPI to exchange rates

  • Goldberg, Linda S.

    (Federal Reserve Bank of New York)

  • Campa, Jose M.

    ()

    (IESE Business School)

Border prices of traded goods are highly sensitive to exchange rates, but the CPI and the retail prices of traded goods are more stable. Our paper decomposes the sources of this stability for twenty-one OECD countries, focusing on the important roles of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported inputs used in different categories of consumption goods, and weights in consumption of nontradables, home tradables and imported goods. While distribution margins damp the sensitivity of consumption prices of tradable goods to exchange rates, they also lead to enhanced pass-through when nontraded goods prices are sensitive to exchange rates. Such price sensitivity arises because imported inputs are used in production of home nontradables. Calibration exercises show that, at under 5%, the United States has the lowest expected CPI sensitivity to exchange rates of all countries examined. On average, calibrated exchange rate pass-through into CPIs is expected to be closer to 15%.

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Paper provided by IESE Business School in its series IESE Research Papers with number D/625.

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Length: 40 pages
Date of creation: 03 Apr 2006
Date of revision:
Handle: RePEc:ebg:iesewp:d-0625
Contact details of provider: Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/

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  1. Hamid Faruqee & Dalia Hakura & Ehsan U. Choudhri, 2002. "Explaining the Exchange Rate Pass-Through in Different Prices," IMF Working Papers 02/224, International Monetary Fund.
  2. Goldberg, Pinelopi Koujianou & Verboven, Frank, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Wiley Blackwell, vol. 68(4), pages 811-48, October.
  3. Maurice Obstfeld., 2001. "International Macroeconomics: Beyond the Mundell-Fleming Model," Center for International and Development Economics Research (CIDER) Working Papers C01-121, University of California at Berkeley.
  4. Corsetti, Giancarlo & Dedola, Luca, 2003. "Macroeconomics of International Price Discrimination," CEPR Discussion Papers 3710, C.E.P.R. Discussion Papers.
  5. Ronald MacDonald & Luca Antonio Ricci, 2001. "PPP and the Balassa Samuelson Effect; The Role of the Distribution Sector," IMF Working Papers 01/38, International Monetary Fund.
  6. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  7. Linda Goldberg & Joseph Tracy, 2001. "Exchange rates and wages," Staff Reports 116, Federal Reserve Bank of New York.
  8. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," RCER Working Papers 473, University of Rochester - Center for Economic Research (RCER).
  9. Kenneth A. Froot & Paul Klemperer, 1989. "Exchange Rate Pass-Through When Market Share Matters," NBER Working Papers 2542, National Bureau of Economic Research, Inc.
  10. Philippe Bacchetta & Eric van Wincoop, 2002. "Why Do Consumer Prices React less than Import Prices to Exchange Rates ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 02.18, Université de Lausanne, Faculté des HEC, DEEP.
  11. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  12. Ariel Burstein & Martin Eichenbaum & Sergio T. Rebelo, 2002. "Why Are Rates of Inflation So Low After Large Devaluations?," RCER Working Papers 486, University of Rochester - Center for Economic Research (RCER).
  13. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  14. Jeannine Bailliu & Hafedh Bouakez, 2004. "Exchange Rate Pass-Through in Industrialized Countries," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 19-28.
  15. 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.).
  16. Michael Devereux & Charles Engel & Cedric Tille, 1999. "Exchange-Rate Pass-Through and the Welfare Effects of the Euro," Discussion Papers in Economics at the University of Washington 0034, Department of Economics at the University of Washington.
  17. Jeffrey A. Frankel & David C. Parsley & Shang-Jin Wei, 2005. "Slow Passthrough Around the World: A New Import for Developing Countries?," NBER Working Papers 11199, National Bureau of Economic Research, Inc.
  18. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  19. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
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  24. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  25. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
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  28. Rebecca Hellerstein, 2004. "Who bears the cost of a change in the exchange rate? The case of imported beer," Staff Reports 179, Federal Reserve Bank of New York.
  29. repec:rus:hseeco:122183 is not listed on IDEAS
  30. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  31. Linda S. Goldberg, 2004. "Industry-specific exchange rates for the United States," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 1-16.
  32. Jose Campa & Linda S. Goldberg, 1997. "The Evolving External Orientation of Manufacturing Industries: Evidence from Four Countries," NBER Working Papers 5919, National Bureau of Economic Research, Inc.
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