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Pass through of exchange rates to consumption prices: What has changed and why?

  • Campa, Jose M.

    ()

    (IESE Business School)

  • Goldberg, Linda S.

    (Bank of New York)

In this paper, we use cross-county and time series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods, as well as to non-traded goods. We highlight three reasons for changing pass through at the level of retail prices of goods. First, pass through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors. This means that the costs of imported goods as well as home tradable goods have heightened sensitivity to import prices and exchange rates. The final channel we consider is whether there have been changing sector expenditures on distribution services, with the direction of change negatively correlated with pass through into final consumption prices. We find that this channel, which has been a means of insulating consumption prices from import content and exchange rates, has not systematically changed in recent years. The balance of effects weighs in favor of increased sensitivity of consumption prices to exchange rates, even if exchange-rate pass-through into import prices has declined for some types of goods.

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File URL: http://www.iese.edu/research/pdfs/DI-0653-E.pdf
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Paper provided by IESE Business School in its series IESE Research Papers with number D/653.

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Length: 30 pages
Date of creation: 11 Sep 2006
Date of revision:
Handle: RePEc:ebg:iesewp:d-0653
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. 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.).
  2. Goldberg, Pinelopi Koujianou & Verboven, Frank, 1998. "The Evolution of Price Dispersion in the European Car Market," CEPR Discussion Papers 2029, C.E.P.R. Discussion Papers.
  3. Otani, Akira & Shiratsuka, Shigenori & Shirota, Toyoichiro, 2006. "Revisiting the Decline in the Exchange Rate Pass-Through: Further Evidence from Japan's Import Prices," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(1), pages 61-75, March.
  4. Philippe Bacchetta & Eric van Wincoop, 2003. "Why Do Consumer Prices React Less Than Import Prices to Exchange Rates?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 662-670, 04/05.
  5. 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.
  6. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  7. 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.
  8. Feenstra, Robert C., 1989. "Symmetric pass-through of tariffs and exchange rates under imperfect competition: An empirical test," Journal of International Economics, Elsevier, vol. 27(1-2), pages 25-45, August.
  9. Christopher Gust & Nathan Sheets, 2007. "The adjustment of global external imbalances: does partial exchange rate pass-through to trade prices matter?," International Finance Discussion Papers 850, Board of Governors of the Federal Reserve System (U.S.).
  10. 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.
  11. Gron, Anne & Swenson, Deborah L, 1996. "Incomplete Exchange-Rate Pass-Through and Imperfect Competition: The Effect of Local Production," American Economic Review, American Economic Association, vol. 86(2), pages 71-76, May.
  12. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph Gagnon & Jaime Marquez & Robert F. Martin & Trevor Reeve & John Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers 833, Board of Governors of the Federal Reserve System (U.S.).
  13. Marazzi, Mario & Sheets, Nathan, 2007. "Declining exchange rate pass-through to U.S. import prices: The potential role of global factors," Journal of International Money and Finance, Elsevier, vol. 26(6), pages 924-947, October.
  14. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  15. Rebecca Hellerstein & Deirdre Daly & Christina Marsh, 2006. "Have U.S. import prices become less responsive to changes in the dollar?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 12(Sep).
  16. Bruce A. Blonigen & Stephen E. Haynes, 2002. "Antidumping Investigations and the Pass-Through of Antidumping Duties and Exchange Rates," American Economic Review, American Economic Association, vol. 92(4), pages 1044-1061, September.
  17. Giancarlo Corsetti & Luca Dedola, 2002. "Macroeconomics of international price discrimination," International Finance Discussion Papers 744, Board of Governors of the Federal Reserve System (U.S.).
  18. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June.
  19. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  20. Jose Manuel Campa & Linda S. Goldberg, 2006. "Distribution margins, imported inputs, and the sensitivity of the CPI to exchange rates," Staff Reports 247, Federal Reserve Bank of New York.
  21. Gil-Pareja, Salvador, 2003. "Pricing to market behaviour in European car markets," European Economic Review, Elsevier, vol. 47(6), pages 945-962, December.
  22. Jane E. Ihrig & Mario Marazzi & Alexander D. Rothenberg, 2006. "Exchange-rate pass-through in the G-7 countries," International Finance Discussion Papers 851, Board of Governors of the Federal Reserve System (U.S.).
  23. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18.
  24. Bernhofen, Daniel M. & Xu, Peng, 2000. "Exchange rates and market power: evidence from the petrochemical industry," Journal of International Economics, Elsevier, vol. 52(2), pages 283-297, December.
  25. repec:rus:hseeco:122183 is not listed on IDEAS
  26. Linda S. Goldberg & Cédric Tille, 2006. "The International Role of the Dollar and Trade Balance Adjustment," NBER Working Papers 12495, National Bureau of Economic Research, Inc.
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