Working Paper: CEPR ID: DP5650
Authors: Linda S. Goldberg; Jos Manuel Campa
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.
Keywords: distribution margins; exchange rate; import prices; pass through
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate fluctuations (F31) | distribution margins (L11) |
| distribution margins (L11) | CPI sensitivity (E31) |
| exchange rate depreciation (F31) | distribution margins (L11) |
| distribution margins (L11) | pass-through rates into import prices (F16) |
| imported inputs (F10) | CPI sensitivity (E31) |
| exchange rate fluctuations (F31) | CPI sensitivity (E31) |