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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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