The Hitchhiker’s Guide to Missing Import Price Changes and Pass-Through
Federal Reserve Board - Trade and Quantitative Studies
Federal Reserve Board - Advanced Foreign Economies
Benjamin R. Mandel
Federal Reserve Bank of New York
January 13, 2012
FRB International Finance Discussion Paper No. 1040
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.
Number of Pages in PDF File: 60
Keywords: exchange rate pass-through, import prices, item replacement
JEL Classification: F31, F41, E30, E01, C81working papers series
Date posted: March 6, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 1.235 seconds