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http://ssrn.com/abstract=832647
 
 

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Slow Passthrough Around the World: A New Import for Developing Countries?


Jeffrey A. Frankel


Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

David C. Parsley


Vanderbilt University - Owen Graduate School of Management; Vanderbilt University

Shang-Jin Wei


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

February 2005

KSG Working Paper No. RWP05-016

Abstract:     
Developing countries traditionally experience passthrough of exchange rate changes that is greater and more rapid than high-income countries experience. This is true equally of the determination of prices of imported goods, prices of local competitors' products, and the general CPI. But developing countries in the 1990s experienced a rapid downward trend in the degree of passthrough and speed of adjustment, more so than did high-income countries. As a consequence, slow and incomplete passthrough is no longer exclusively a luxury of industrial countries. Using a new data set - prices of eight narrowly defined brand commodities, observed in 76 countries - we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the passthrough coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability. Some of these factors changed during the 1990s. Part (and only part) of the downward trend in passthrough to imported goods prices, and in turn to competitors' prices and the CPI, can be explained by changes in the monetary environment - including a fall in long-term inflation. Real wages work to reduce passthrough to competitors' prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the passthrough coefficient in some developing countries.

Number of Pages in PDF File: 75

Keywords: Economics - International Economics, Economics - Macroeconomics, International Affairs/Globalization, International Development, International Trade and Finance

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Date posted: January 12, 2006  

Suggested Citation

Frankel, Jeffrey A. and Parsley, David C. and Wei, Shang-Jin, Slow Passthrough Around the World: A New Import for Developing Countries? (February 2005). KSG Working Paper No. RWP05-016. Available at SSRN: http://ssrn.com/abstract=832647 or http://dx.doi.org/10.2139/ssrn.832647

Contact Information

Jeffrey A. Frankel (Contact Author)
Harvard University - Harvard Kennedy School (HKS) ( email )
79 John F. Kennedy Street
Mailbox 22
Cambridge, MA 02138
United States
617-496-3834 (Phone)
617-496-5747 (Fax)
HOME PAGE: http://www.ksg.harvard.edu/fs/jfrankel
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
David C. Parsley
Vanderbilt University - Owen Graduate School of Management ( email )
401 21st Avenue South
Nashville, TN 37203
United States
615-322-0649 (Phone)
615-343-7177 (Fax)
Vanderbilt University ( email )
401 21st Avenue South
Nashville, TN 37203
United States
615-322-0649 (Phone)
615-343-7177 (Fax)

Shang-Jin Wei
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
International Monetary Fund (IMF)
700 19th Street, N.W.
Washington, DC 20431
United States
Tsinghua University - School of Economics & Management
Beijing, 100084
China
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