Exchange Rate Pass-Through to U.S. Import Prices: Some New Evidence

67 Pages Posted: 4 May 2005

See all articles by Nathan Sheets

Nathan Sheets

Federal Reserve Board

Mario Marazzi

Board of Governors of the Federal Reserve System - Division of International Finance (IFDP)

Robert J. Vigfusson

Federal Reserve Board - Trade and Quantitative Studies

Jon Faust

Board of Governors of the Federal Reserve - Division of International Finance; Johns Hopkins University

Joseph Gagnon

Peterson Institute

Robert F. Martin

Federal Reserve Board - International Finance Division

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section

Trevor A. Reeve

U.S. Trade and Quantitative Studies

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Date Written: April 2005

Abstract

This paper documents a sustained decline in exchange rate pass-through to U.S. import prices, from above 0.5 during the 1980s to somewhere in the neighborhood of 0.2 during the last decade. This decline in the pass-through coefficient is robust to the measure of foreign prices that is included in the regression (i.e., CPI versus PPI), whether the estimation is done in levels or differences, and whether U.S. prices are included as an explanatory variable. Notably, the largest estimates of pass-through are obtained when commodity prices are excluded from the regression. In this case, the pass-through coefficient captures both the direct effect of the exchange rate on import prices and an indirect effect operating through changes in commodity prices. Our work indicates that an increasing share of exchange rate pass-through has occurred through this commodity-price channel in recent years. While the source of the decline in pass-through is difficult to pin down with certainty, our work points to several factors, including the reduced share of (commodity-intensive) industrial supplies in U.S. imports and the increased presence of Chinese exporters in U.S. markets. We detect a particular step down in the pass-through coefficient around the time of the Asian financial crisis and document a shift in the export pricing behavior of emerging Asian firms around that time.

Keywords: external adjustment, U.S. current account, commodity prices, China

JEL Classification: E31, F3, F41

Suggested Citation

Sheets, Nathan and Marazzi, Mario and Vigfusson, Robert John and Faust, Jon and Gagnon, Joseph and Martin, Robert F. and Marquez, Jaime and Reeve, Trevor A. and Rogers, John H., Exchange Rate Pass-Through to U.S. Import Prices: Some New Evidence (April 2005). IFCD Paper No. 833. Available at SSRN: https://ssrn.com/abstract=715121 or http://dx.doi.org/10.2139/ssrn.715121

Nathan Sheets (Contact Author)

Federal Reserve Board ( email )

20th St. and Constitution Ave.
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202-452-3819 (Phone)
202-736-5638 (Fax)

Mario Marazzi

Board of Governors of the Federal Reserve System - Division of International Finance (IFDP) ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-6489 (Phone)
202-872-4926 (Fax)

Robert John Vigfusson

Federal Reserve Board - Trade and Quantitative Studies ( email )

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

Jon Faust

Board of Governors of the Federal Reserve - Division of International Finance ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2328 (Phone)
202-736-5638 (Fax)

Johns Hopkins University

Baltimore, MD 20036-1984
United States

Joseph Gagnon

Peterson Institute ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://www.piie.com

Robert F. Martin

Federal Reserve Board - International Finance Division ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-872-7564 (Phone)
202-736-5638 (Fax)

HOME PAGE: http://www.rfmartin.com

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Trevor A. Reeve

U.S. Trade and Quantitative Studies ( email )

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

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

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