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Pass-through of exchange rates to consumption prices: what has changed and why

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Abstract

In this paper, we use cross-country 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 the change in pass-through into the 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, meaning that the costs of imported goods as well as home-tradable goods have heightened sensitivity to import prices and exchange rates. Finally, we consider whether there have been changing sectoral 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. On balance, these effects support increased sensitivity of consumption prices to exchange rates, even if exchange rate pass-through into import prices has declined for some types of goods.

Suggested Citation

  • Jose Manuel Campa & Linda S. Goldberg, 2006. "Pass-through of exchange rates to consumption prices: what has changed and why," Staff Reports 261, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:261
    Note: For a published version of this report, see José Manuel Campa and Linda S. Goldberg, "Pass-Through of Exchange Rates to Consumption Prices: What Has Changed and Why?" in Takatoshi Ito and Andrew K. Rose, eds., International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy. East Asia Seminar on Economics 17. NBER conference volume. Chicago: University of Chicago Press.
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    More about this item

    Keywords

    exchange rates; pass-through entities; import prices; distribution margins; consumer prices; imported inputs;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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