Article(electronic)December 1, 2012

Lost in Transit: Product Replacement Bias and Pricing to Market

In: American economic review, Volume 102, Issue 7, p. 3277-3316

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Abstract

In the microdata underlying US trade price indexes, 40 percent of products are replaced before a single price change is observed and 70 percent are replaced after two price changes or fewer. A price index that focuses on price changes for identical items 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 US data. Accounting for product replacement bias, long-run exchange rate "pass-through" is substantially higher than conventional estimates suggest, and the terms of trade are substantially more volatile. (JEL F14, F31)

Languages

English

Publisher

American Economic Association

ISSN: 1944-7981

DOI

10.1257/aer.102.7.3277

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