Staff Reports
Missing Import Price Changes and Low Exchange Rate Pass-Through
Previous title: "The Hitchhiker's Guide to Missing Import Price Changes and Pass-Through"
January 2012  Number 537
Revised July 2012
JEL classification: F31, F41, E30, E01, C81

Authors: Etienne Gagnon, Benjamin R. Mandel, and Robert J. Vigfusson

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.

Available only in PDF pdf  58 pages / 830 kb
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