Missing Import Price Changes and Low Exchange Rate Pass-Through
Etienne Gagnon (),
Benjamin Mandel () and
Robert Vigfusson ()
No 1040, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
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.
Keywords: Exchange rate pass-through; import prices; item replacement (search for similar items in EconPapers)
JEL-codes: C81 E01 E30 F31 F41 (search for similar items in EconPapers)
Pages: 58 pages
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Journal Article: Missing Import Price Changes and Low Exchange Rate Pass-Through (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1040
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