Working Paper: NBER ID: w12547
Authors: Jose Manuel Campa; Linda S. Goldberg
Abstract: In this paper, we use cross-county 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 changing pass through at the level of 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. This means that the costs of imported goods as well as home tradable goods have heightened sensitivity to import prices and exchange rates. The final channel we consider is 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. The balance of effects weighs in favor of 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: No keywords provided
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased reliance on imported inputs in production (F69) | Greater sensitivity of production costs to exchange rates (F31) |
| Greater sensitivity of production costs to exchange rates (F31) | Increased sensitivity of consumption prices to exchange rates (F31) |
| Diminished insulation effect of distribution services (D39) | Increased sensitivity of consumption prices to exchange rates (F31) |
| Decline in pass-through at the level of import prices (F14) | Increased sensitivity of consumption prices to exchange rates (F31) |