Lost in Transit: Product Replacement Bias and Pricing to Market / Emi Nakamura, Jón Steinsson.

Format:

Book

Author/Creator:

Nakamura, Emi.

Contributor:

National Bureau of Economic Research.

Steinsson, Jón.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15359.

NBER working paper series no. w15359

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Lost in Transit

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

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.

Notes:

Print version record

September 2009.