Exchange Rate Pass-Through to U.S. Import Prices: Some New Evidence

Posted: 6 Jul 2021 Last revised: 3 Jul 2021

See all articles by Jon Faust

Jon Faust

Board of Governors of the Federal Reserve System

Joseph Gagnon

Peterson Institute

Mario Marazzi

Board of Governors of the Federal Reserve System

Jaime Marquez

Board of Governors of the Federal Reserve System

Robert F. Martin

affiliation not provided to SSRN

Trevor A. Reeve

affiliation not provided to SSRN

John H. Rogers

Fudan University - Fanhai International School of Finance (FISF)

Nathan Sheets

Board of Governors of the Federal Reserve System

Robert J. Vigfusson

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2005

Abstract

This paper documents a sustained decline in exchange rate pass-through to U.S. import prices, from above 0.5 during the 1980s to somewhere in the neighborhood of 0.2 during the last decade. This decline in the pass-through coefficient is robust to the measure of foreign prices that is included in the regression (i.e., CPI versus PPI), whether the estimation is done in levels or differences, and whether U.S. prices are included as an explanatory variable. Notably, the largest estimates of pass-through are obtained when commodity prices are excluded from the regression. In this case, the pass-through coefficient captures both the direct effect of the exchange rate on import prices and an indirect effect operating through changes in commodity prices. Our work indicates that an increasing share of exchange rate pass-through has occurred through this commodity-price channel in recent years. While the source of the decline in pass-through is difficult to pin down with certainty, our work points to several factors, including the reduced share of (commodity-intensive) industrial supplies in U.S. imports and the increased presence of Chinese exporters in U.S. markets. We detect a particular step down in the pass-through coefficient around the time of the Asian financial crisis and document a shift in the export pricing behavior of emerging Asian firms around that time.

Suggested Citation

Faust, Jon and Gagnon, Joseph and Marazzi, Mario and Marquez, Jaime and Martin, Robert F. and Reeve, Trevor A. and Rogers, John H. and Sheets, Nathan and Vigfusson, Robert John, Exchange Rate Pass-Through to U.S. Import Prices: Some New Evidence (2005). Available at SSRN: https://ssrn.com/abstract=3879306

Jon Faust (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Joseph Gagnon

Peterson Institute ( email )

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Mario Marazzi

Board of Governors of the Federal Reserve System ( email )

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Jaime Marquez

Board of Governors of the Federal Reserve System ( email )

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Robert F. Martin

affiliation not provided to SSRN

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Trevor A. Reeve

affiliation not provided to SSRN

No Address Available

John H. Rogers

Fudan University - Fanhai International School of Finance (FISF) ( email )

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Shanghai, 200433
China

Nathan Sheets

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-3819 (Phone)
202-736-5638 (Fax)

Robert John Vigfusson

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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