Pass Through of Exchange Rates to Consumption Prices: What has Changed and Why?

Jose Campa and Linda Goldberg

No 12547, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we use cross-county 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 changing pass through at the level of 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. This means that the costs of imported goods as well as home tradable goods have heightened sensitivity to import prices and exchange rates. The final channel we consider is 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. The balance of effects weighs in favor of increased sensitivity of consumption prices to exchange rates, even if exchange-rate pass-through into import prices has declined for some types of goods.

JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-fmk and nep-ifn
Note: IFM ITI
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Published as Jose Manuel Campa & Linda S. Goldberg, 2008. "Pass-Through of Exchange Rates to Consumption Prices: What Has Changed and Why?," NBER Chapters, in: International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy (NBER-EASE Volume 17), pages 139-176 National Bureau of Economic Research, Inc.

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Related works:
Chapter: Pass-Through of Exchange Rates to Consumption Prices: What Has Changed and Why? (2008)
Working Paper: Pass through of exchange rates to consumption prices: What has changed and why? (2006)
Working Paper: Pass-through of exchange rates to consumption prices: what has changed and why (2006)
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