Emi Nakamura

Lost in Transit: Product Replacement Bias and Pricing to Market

Coauthor(s): Jón Steinsson.

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.

Source: American Economic Review
Exact Citation:
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.
Volume: 102
Number: 7
Pages: 3277-3316
Date: 12 2012