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Title:The hitchhiker's guide to missing import price changes and pass-through PDF Logo
Authors:Gagnon, Etienne
Mandel, Benjamin R.
Vigfusson, Robert J.
Issue Date:2012
Series/Report no.:Staff Report, Federal Reserve Bank of New York 537
Abstract: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 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 do not materially alter the literature's view that pass-through to U.S. import prices is low over the short- to medium-term horizons that are most useful for both forecasting and differentiating among economic models.
Subjects:exchange rate pass-through
price index
JEL:F31
F41
E30
E01
C81
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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