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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Missing Import Price Changes and Low Exchange Rate Pass-Through
Etienne Gagnon, Benjamin R. Mandel, and Robert J. Vigfusson
2012-1040  (January 2012, latest version December 2012)

Abstract:  A large body of empirical work has found that exchange rate movements have only modest effects on inflation. However, the response of an import price index to exchange rate movements may be underestimated because some import price changes are missed when constructing the index. We investigate downward biases that arise when items experiencing a price change are especially likely to exit or to enter the index. We show that, in theoretical pricing models, entry and exit have different implications for the timing and size of these biases. Using Bureau of Labor Statistics (BLS) microdata, we derive empirical bounds on the magnitude of these biases and construct alternative price indexes that are less subject to selection effects. Our analysis suggests that the biases induced by selective exits and entries are modest over typical forecast horizons. As such, the empirical evidence continues to support the conclusion that exchange rate pass-through to U.S. import prices is low.

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Exchange rate pass-through, import prices, item replacement

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