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

48 Pages Posted: 15 May 2006

See all articles by Linda S. Goldberg

Linda S. Goldberg

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

José Manuel Campa

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

Multiple version iconThere are 4 versions of this paper

Date Written: April 2006

Abstract

Border prices of traded goods are highly sensitive to exchange rates; however, the consumer price index (CPI) and the retail prices of goods that make up the CPI are more stable. This paper decomposes the sources of this price stability for twenty-one OECD (Organisation for Economic Co-operation and Development) countries, focusing on the important role 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 the 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 the prices of nontraded goods are sensitive to exchange rates. Such price sensitivity arises because imported inputs are used in the production of home nontradables. Calibration exercises show that, of all countries examined, the United States has the lowest expected CPI sensitivity to exchange rates - at less than 5 percent. On average, the calibrated exchange rate pass-through into CPI is expected to be closer to 15 percent.

Keywords: pass through, exchange rate, price, imported input, consumer price

JEL Classification: F3, F4

Suggested Citation

Goldberg, Linda S. and Campa, José Manuel, Distribution Margins, Imported Inputs, and the Sensitivity of the CPI to Exchange Rates (April 2006). FRB of New York Staff Report No. 247. Available at SSRN: https://ssrn.com/abstract=902360 or http://dx.doi.org/10.2139/ssrn.902360

Linda S. Goldberg (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045
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National Bureau of Economic Research (NBER)

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José Manuel Campa

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

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Madrid, 28023
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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