Working Paper: NBER ID: w15359
Authors: Emi Nakamura; J. N. Steinsson
Abstract: The microdata underlying U.S. import and export price indexes exhibit frequent product turnover and highly rigid prices. As a consequence, 40% of products are replaced before a single price change is observed and 70% are replaced after two price changes or less. An aggregate price index that focuses on price changes for identical items over time may, therefore, miss an important component of price adjustment occurring at the time of product replacements. We provide a model of this "product replacement bias" and quantify its importance using U.S. microdata on import and export prices. We show that, accounting for product replacement bias, long-run exchange rate "pass-through" into U.S. import and export price indexes is almost twice as high as conventional estimates suggest, and changes in the terms of trade are roughly 75% more volatile. Our adjustment makes pass-through statistics easier to account for with existing general equilibrium models.
Keywords: Product Replacement Bias; Exchange Rate Pass-Through; Pricing to Market
JEL Codes: C81; E01; E31; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| product replacement bias (L15) | underestimation of long-run exchange rate pass-through into US import prices (F31) |
| product replacement bias (L15) | changes in terms of trade volatility (F14) |
| product replacement bias (L15) | downward bias for local currency-priced products (F31) |
| product replacement bias (L15) | upward bias for producer currency-priced products (F31) |
| first observed price change (P22) | overreaction to past exchange rate changes (F31) |
| overreaction to past exchange rate changes (F31) | mitigation of product replacement bias (L15) |