Trade Policy Shocks and Consumer Prices

27 Pages Posted: 22 Oct 2019

Date Written: October 10, 2019

Abstract

I examine the import price pass-through and its heterogeneity across consumers in the Great Trade Collapse (GTC) by linking US import prices and barcode-level consumer prices. I estimate the import price impact of trade policy uncertainty (TPU) across industries in 2004-2011 and use it as first stage to identify the import price pass-through rate to consumers. I find this rate ranges from 0.2-0.4 and is heterogeneous: higher for consumers with lower income and in markets with higher retail competition. The differences in pass-through across consumers are magnified after adjusting for the availability of varieties. To explain these findings, I build on Burstein and Gopinath (2014) to model domestic distribution services with variable markups and extend it to allow for consumer price heterogeneity. Differences in consumer expenditure shares across varieties with different pass-through and differential pass-through for the same variety across consumers account for the heterogeneous pass-through, with the former plays a more important role. A quantitative exercise shows that consumer prices of the affected goods increase by 0.87% to 1.4% on average in response to 25% tariffs on Chinese imports.

Keywords: Trade Policy, Consumer Prices

JEL Classification: F1

Suggested Citation

Li, Lerong, Trade Policy Shocks and Consumer Prices (October 10, 2019). Available at SSRN: https://ssrn.com/abstract=3467808 or http://dx.doi.org/10.2139/ssrn.3467808

Lerong Li (Contact Author)

University of Maryland ( email )

College Park, MD 20742
United States
3012191607 (Phone)
20740 (Fax)

HOME PAGE: http://econweb.umd.edu/~lil/

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