Buy Foreign While You Can: The Cheap Dollar and Exchange Rate Pass-Through

Abstract

1To provide a broad picture of the incidence of the ERPT phenomenon, the analysis first decomposes domestic import prices to their foreign price and exchange rate components. Some econometric exercises then test for the presence of ERPT in selected import categories. These categories are different from those generally used in other studies in many ways, but perhaps most importantly in their level of disaggregation. In general, the data show low ERPT at the monthly frequency over the last decade. The ERPT elasticity of total imports’ prices averages 18 percent—that is, for every 1 percent the dollar depreciates (appreciates), the price of imports increases (decreases) 0.18 percent although this average varies considerably across categories. Items defined as capital goods or consumer goods consistently have low ERPT. On the other hand, most of the results suggest that the dollar’s value does not affect the prices of products in the industrial supplies and materials category. Like previous studies, this study finds a generalized downward trend in ERPT elasticities for the main import categories. At a more disaggregated level, however, the analysis finds several instances of a reversion toward higher ERPT during the last months of 2004. The article begins with a brief review of the empirical literature and a simple decomposition of the import prices data. The presentation of the theoretical model

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