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

Board of Governors of the Federal Reserve System

Mario Marazzi

Board of Governors of the Federal Reserve System

Robert J. Vigfusson

Board of Governors of the Federal Reserve System

Jon Faust

Board of Governors of the Federal Reserve System

Joseph Gagnon

Peterson Institute

Robert F. Martin

Federal Reserve Board - International Finance Division

Jaime Marquez

Board of Governors of the Federal Reserve System

Trevor A. Reeve

Board of Governors of the Federal Reserve System

John H. Rogers

Board of Governors of the Federal Reserve System

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). Available at SSRN: https://ssrn.com/abstract=715121 or http://dx.doi.org/10.2139/ssrn.715121

Nathan Sheets (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Mario Marazzi

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-6489 (Phone)
202-872-4926 (Fax)

Robert John Vigfusson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jon Faust

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2328 (Phone)
202-736-5638 (Fax)

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 ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Trevor A. Reeve

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

John H. Rogers

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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