Missing Import Price Changes and Low Exchange Rate Pass-Through

59 Pages Posted: 30 May 2017

See all articles by Etienne Gagnon

Etienne Gagnon

Board of Governors of the Federal Reserve System

Benjamin R. Mandel

Federal Reserve Bank of New York

Robert J. Vigfusson

Federal Reserve Board - Trade and Quantitative Studies

Date Written: 2012

Abstract

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

JEL Classification: C81, E01, E01, E30, F31, F41

Suggested Citation

Gagnon, Etienne and Mandel, Benjamin R. and Vigfusson, Robert John, Missing Import Price Changes and Low Exchange Rate Pass-Through (2012). FRB International Finance Discussion Paper No. 1040. Available at SSRN: https://ssrn.com/abstract=2976733

Etienne Gagnon (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
2024523522 (Phone)

Benjamin R. Mandel

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Robert John Vigfusson

Federal Reserve Board - Trade and Quantitative Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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