The hitchhiker's guide to missing import price changes and pass-through
A large body of empirical work has found that exchange rate movements have only modest effects on inflation. However, the response of an import price index to exchange rate movements may be underestimated because some import price changes are missed when constructing the index. We investigate downward biases that arise when items experiencing a price change are especially likely to exit or to enter the index. We show that, in theoretical pricing models, entry and exit have different implications for the timing and size of these biases. Using Bureau of Labor Statistics (BLS) microdata, we derive empirical bounds on the magnitude of these biases and construct alternative price indexes that are less subject to selection effects. Our analysis suggests that the biases induced by selective exits and entries do not materially alter the literature’s view that pass-through to U.S. import prices is low over the short to medium term horizons that are most useful for both forecasting and differentiating amongst economic models.
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- 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.).
- Christopher Gust & Sylvain Leduc & Robert Vigfusson, 2006.
"Trade Integration, Competiton, and the Decline in Exchange-rate Pass-through,"
2006 Meeting Papers
165, Society for Economic Dynamics.
- Gust, Christopher & Leduc, Sylvain & Vigfusson, Robert, 2010. "Trade integration, competition, and the decline in exchange-rate pass-through," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 309-324, April.
- Christopher Gust & Sylvain Leduc & Robert J. Vigfusson, 2006. "Trade integration, competition, and the decline in exchange-rate pass-through," International Finance Discussion Papers 864, Board of Governors of the Federal Reserve System (U.S.).
- Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010.
"Currency Choice and Exchange Rate Pass-Through,"
American Economic Review,
American Economic Association, vol. 100(1), pages 304-36, March.
- Gita Gopinath & Oleg Itskhoki, 2008.
"Frequency of Price Adjustment and Pass-through,"
NBER Working Papers
14200, National Bureau of Economic Research, Inc.
- Leif Danziger, 1998.
"A Dynamic Economy with Costly Price Adjustment,"
Cahiers de recherche CREFE / CREFE Working Papers
83, CREFE, Université du Québec à Montréal.
- 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.
- Neiman, Brent, 2010. "Stickiness, synchronization, and passthrough in intrafirm trade prices," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 295-308, April.
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