Distribution Margins, Imported Inputs, and the Sensitivity of the CPI to Exchange Rates

48 Pages Posted: 14 Jul 2006 Last revised: 16 Aug 2010

See all articles by José Manuel Campa

José Manuel Campa

University of Navarra - Madrid Campus - IESE Business School; National Bureau of Economic Research (NBER)

Linda S. Goldberg

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: March 2006

Abstract

Border prices of traded goods are highly sensitive to exchange rates, but the CPI, and the retail prices of these goods, are more stable. Our paper decomposes the sources of this stability for twenty-one OECD countries, focusing on the important roles of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported inputs used in different categories of consumption goods, and weights in consumption of nontradables, home tradables and imported goods. While distribution margins damp the sensitivity of consumption prices of tradable goods to exchange rates, they also lead to enhanced pass through when nontraded goods prices are sensitive to exchange rates. Such price sensitivity arises because imported inputs are used in production of home nontradables. Calibration exercises show that, at under 5 percent, the United States has the lowest expected CPI sensitivity to exchange rates of all countries examined. On average, calibrated exchange rate pass through into CPIs is expected to be closer to 15 percent.

Suggested Citation

Campa, José Manuel and Goldberg, Linda S., Distribution Margins, Imported Inputs, and the Sensitivity of the CPI to Exchange Rates (March 2006). NBER Working Paper No. w12121. Available at SSRN: https://ssrn.com/abstract=893776

José Manuel Campa (Contact Author)

University of Navarra - Madrid Campus - IESE Business School ( email )

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Madrid, 28023
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National Bureau of Economic Research (NBER)

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Linda S. Goldberg

Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States
212-720-2836 (Phone)
212-720-6831 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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