Pass-Through of Exchange Rates to Consumption Prices: What Has Changed and Why

36 Pages Posted: 27 Sep 2006

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)

Date Written: September 2006

Abstract

In this paper, we use cross-country and time-series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods as well as to non-traded goods. We highlight three reasons for the change in pass-through into the retail prices of goods. First, pass-through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors, meaning that the costs of imported goods as well as home-tradable goods have heightened sensitivity to import prices and exchange rates. Finally, we consider whether there have been changing sectoral expenditures on distribution services, with the direction of change negatively correlated with pass-through into final consumption prices. We find that this channel, which has been a means of insulating consumption prices from import content and exchange rates, has not systematically changed in recent years. On balance, these effects support increased sensitivity of consumption prices to exchange rates, even if exchange rate pass-through into import prices has declined for some types of goods.

Keywords: exchange rate, pass-through, import prices, distribution margins, consumer prices, imported inputs

JEL Classification: F3, F4

Suggested Citation

Campa, José Manuel and Goldberg, Linda S., Pass-Through of Exchange Rates to Consumption Prices: What Has Changed and Why (September 2006). FRB of New York Staff Report No. 261. Available at SSRN: https://ssrn.com/abstract=932598 or http://dx.doi.org/10.2139/ssrn.932598

José Manuel Campa

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

Camino del Cerro del Aguila 3
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

Linda S. Goldberg (Contact Author)

Federal Reserve Bank of New York ( email )

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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