Lost in Transit: Product Replacement Bias and Pricing to Market
Coauthor(s): Jón Steinsson.
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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.
Source: American Economic Review
Nakamura, Emi, and Jón Steinsson. "Lost in Transit: Product Replacement Bias and Pricing to Market." American Economic Review 102, no. 7 (December 2012): 3277-3316.