Working Paper: NBER ID: w2483
Authors: Richard Baldwin
Abstract: This paper empirically investigates the hypothesis that hysteresis has occurred in US aggregate non-oil import prices. We find strong evidence that a shift has occurred in the exchange rate pass-through relationship in the 1980~~ and that the nature of the shift is consistent with the hysteresis hypothesis. Results on two specific structural models of this phenomenon (the beachhead model and the bottleneck model) are less conclusive. The data broadly support both models, but neither by itself can provide a convincing accounting of all the evidence.
Keywords: hysteresis; import prices; exchange rates; passthrough relationship
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rates (F31) | US aggregate non-oil import prices (L79) |
| rising dollar (F31) | US aggregate non-oil import prices (L79) |
| falling dollar (F31) | US aggregate non-oil import prices (L79) |
| exchange rate dynamics (F31) | expected marginal cost and profit margins of foreign firms (F23) |
| structural breaks in passthrough relationship (L14) | hysteresis in import prices (F14) |
| increased competition from new foreign entrants (F23) | lower profit margins and prices (L11) |
| capacity constraints in distribution (D39) | lag in passthrough of exchange rate changes to import prices (F31) |