IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Slow Passthrough Around the World: A New Import for Developing Countries?

  • Frankel, Jeffrey

    (Harvard U)

  • Parsley, David
  • Wei, Shang-Jin

Developing countries traditionally experience passthrough of exchange rate changes that is greater and more rapid than high-income countries experience. This is true equally of the determination of prices of imported goods, prices of local competitors’ products, and the general CPI. But developing countries in the 1990s experienced a rapid downward trend in the degree of passthrough and speed of adjustment, more so than did high-income countries. As a consequence, slow and incomplete passthrough is no longer exclusively a luxury of industrial countries. Using a new data set -- prices of eight narrowly defined brand commodities, observed in 76 countries -- we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the passthrough coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability. Some of these factors changed during the 1990s. Part (and only part) of the downward trend in passthrough to imported goods prices, and in turn to competitors’ prices and the CPI, can be explained by changes in the monetary environment – including a fall in long-term inflation. Real wages work to reduce passthrough to competitors’ prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the passthrough coefficient in some developing countries.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://ksgnotes1.harvard.edu/research/wpaper.NSF/rwp/RWP05-016/$File/rwp_05_016_frankel.pdf
Our checks indicate that this address may not be valid because: 404 Not Found (http://ksgnotes1.harvard.edu/research/wpaper.NSF/rwp/RWP05-016/$File/rwp_05_016_frankel.pdf [302 Found]--> http://web.hks.harvard.edu/publications/workingpapers/Index.aspx). If this is indeed the case, please notify ()


Download Restriction: no

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp05-016.

as
in new window

Length:
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:ecl:harjfk:rwp05-016
Contact details of provider: Postal: 79 JFK Street, Cambridge, MA 02138
Fax: 617-496-2554
Web page: http://www.ksg.harvard.edu/research/working_papers/index.htm

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. repec:idb:brikps:21158 is not listed on IDEAS
  2. Robert C. Feenstra, 1987. "Symmetric Pass-Through of Tariffs and Exchange Rates Under Imperfect Competition: An Empirical Test," NBER Working Papers 2453, National Bureau of Economic Research, Inc.
  3. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange rate pass-through into import prices: a macro or micro phenomenon?," Staff Reports 149, Federal Reserve Bank of New York.
  4. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2004. "Large Devaluations and the Real Exchange Rate," CEPR Discussion Papers 4810, C.E.P.R. Discussion Papers.
  5. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," NBER Working Papers 9543, National Bureau of Economic Research, Inc.
  6. Kenneth A. Froot & Paul Klemperer, 1988. "Exchange Rate Pass-Through When Market Share Matters," NBER Working Papers 2542, National Bureau of Economic Research, Inc.
  7. Gagnon, Joseph E. & Knetter, Michael M., 1995. "Markup adjustment and exchange rate fluctuations: evidence from panel data on automobile exports," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 289-310, April.
  8. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
  9. corrinne ho & robert n mccauley, 2004. "Living with flexible exchange rates:," International Finance 0411003, EconWPA.
  10. Luis Carranza & José E. Galdón-Sánchez & Javier Gómez Biscarri, 2004. "Exchange Rate and Inflation Dynamics in Dollarized Economies," Faculty Working Papers 10/04, School of Economics and Business Administration, University of Navarra.
  11. Shiu-Sheng Chen & Charles Engel, 2004. "Does "Aggregation Bias" Explain the PPP Puzzle?," NBER Working Papers 10304, National Bureau of Economic Research, Inc.
  12. M.B. Devereux & Ch. Engel, 2003. "Exchange Rate Pass-Through, Exchange Rate Volatility, and ExchangeRate Disconnect," DNB Staff Reports (discontinued) 77, Netherlands Central Bank.
  13. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2002. "Why Are Rates of Inflation So Low After large Devaluations," CEPR Discussion Papers 3178, C.E.P.R. Discussion Papers.
  14. 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.
  15. Bacchetta, Philippe & van Wincoop, Eric, 2003. "Why do Consumer Prices React Less than Import Prices to Exchange Rates?," CEPR Discussion Papers 3702, C.E.P.R. Discussion Papers.
  16. Jiawen Yang, 1997. "Exchange Rate Pass-Through In U.S. Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 95-104, February.
  17. DavidC. Parsley & Shang-Jin Wei, 2007. "A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates," Economic Journal, Royal Economic Society, vol. 117(523), pages 1336-1356, October.
  18. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based-Stabilizations," NBER Working Papers 7862, National Bureau of Economic Research, Inc.
  19. Kasa, Kenneth, 1992. "Adjustment costs and pricing-to-market theory and evidence," Journal of International Economics, Elsevier, vol. 32(1-2), pages 1-30, February.
  20. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  21. Otani, Akira & Shiratsuka, Shigenori & Shirota, Toyoichiro, 2003. "The Decline in the Exchange Rate Pass-Through: Evidence from Japanese Import Prices," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(3), pages 53-81, October.
  22. Jean Imbs & Haroon Mumtaz & Morton O. Ravn & Helene Rey, 2002. "PPP Strikes Back: Aggregation and the Real Exchange Rate," NBER Working Papers 9372, National Bureau of Economic Research, Inc.
  23. Giancarlo CORSETTI & Luca DEDOLA, 2003. "Macroeconomics of International Price Discrimination," Economics Working Papers ECO2003/20, European University Institute.
  24. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  25. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  26. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
  27. 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.
  28. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices; Does the Inflationary Environment Matter?," IMF Working Papers 01/194, International Monetary Fund.
  29. Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons From The Economist," NBER Working Papers 4806, National Bureau of Economic Research, Inc.
  30. Maloney, William F, 1999. "Exchange Rate Uncertainty and the Law of One Price," Review of International Economics, Wiley Blackwell, vol. 7(2), pages 328-41, May.
  31. Knetter, Michael M, 1993. "International Comparisons of Price-to-Market Behavior," American Economic Review, American Economic Association, vol. 83(3), pages 473-86, June.
  32. David Parsley, 2002. "Pricing in International Markets: a 'Small-Country' Benchmark," International Finance 0211002, EconWPA.
  33. Frankel, Jeffrey A, 1984. "The Theory of Trade in Middle Products: An Extension," American Economic Review, American Economic Association, vol. 74(3), pages 485-87, June.
  34. Shang-Jin Wei & Irina Tytell, 2004. "Does Financial Globalization Induce Better Macroeconomic Policies?," IMF Working Papers 04/84, International Monetary Fund.
  35. Catherine L. Mann, 1986. "Prices, profit margins, and exchange rates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 366-379.
  36. Michael B. Devereux & James Yetman, 2002. "Price Setting and Exhange Rate Pass-Through," Working Papers 222002, Hong Kong Institute for Monetary Research.
  37. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  38. 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.
  39. Kenichi Ohno, 1989. "Export Pricing Behavior of Manufacturing: A U.S.: Japan Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 550-579, September.
  40. 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.).
  41. Aw, Bee-Yan, 1993. "Price discrimination and markups in export markets," Journal of Development Economics, Elsevier, vol. 42(2), pages 315-336, December.
  42. barhoumi karim, 2004. "Exchange Rate Pass-Through Into Import Prices In Developing Countries: An Empirical Investigation," Economics Bulletin, AccessEcon, vol. 28(10), pages A0.
  43. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
  44. Stephen P. Magee, 1973. "Currency Contracts, Pass-Through, and Devaluation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 303-325.
  45. Knetter, Michael M, 1989. "Price Discrimination by U.S. and German Exporters," American Economic Review, American Economic Association, vol. 79(1), pages 198-210, March.
  46. Corrinne Ho & Robert N. McCauley, 2003. "Living with flexible exchange rates: issues and recent experience in inflation targeting emerging market economies," BIS Working Papers 130, Bank for International Settlements.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ecl:harjfk:rwp05-016. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.