Distribution margins, imported inputs, and the insensitivity of the CPI to exchange rates

Linda S. Goldberg () and Jose Manuel Campa

No D/625, IESE Research Papers from IESE Business School

Abstract: 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%.

Keywords: Exchange rate; pass through; import prices; distribution margins (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-ifn
Date: 2006-04-03
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Related works:
Working Paper: Distribution Margins, Imported Inputs and the Insensitivity of the CPI to Exchange Rates (2006)
Working Paper: Distribution margins, imported inputs, and the sensitivity of the CPI to exchange rates (2006)
Working Paper: Distribution Margins, Imported Inputs, and the Sensitivity of the CPI to Exchange Rates (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:ebg:iesewp:d-0625

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