TY - JOUR AU - Frankel,Jeffrey A. AU - Parsley,David C. AU - Wei,Shang-Jin TI - Slow Passthrough Around the World: A New Import for Developing Countries? JF - National Bureau of Economic Research Working Paper Series VL - No. 11199 PY - 2005 Y2 - March 2005 UR - http://www.nber.org/papers/w11199 L1 - http://www.nber.org/papers/w11199.pdf N1 - Author contact info: Jeffrey A. Frankel Kennedy School of Government Harvard University 79 JFK Street Cambridge, MA 02138 Tel: 617/496-3834 Fax: 617/496-5747 E-Mail: jeffrey_frankel@harvard.edu david parsley Owen Graduate School Vanderbilt University Nashville, TN 37203 Tel: 615.322.0649 Fax: 615.343.7177 E-Mail: david.parsley@vanderbilt.edu Shang-Jin Wei Graduate School of Business Columbia University Uris Hall 619 3022 Broadway New York, NY 10027-6902 Tel: 212/854-9139 E-Mail: shangjin.wei@columbia.edu AB - Developing countries traditionally exhibit passthrough of exchange rate changes that is greater and more rapid than high-income countries, but have experienced a rapid downward trend in recent years in the degree of short-run passthrough, and in the adjustment speed. As a consequence, slow and incomplete passthrough is no longer exclusively a luxury of industrial countries. Using a new data set -- prices of eight narrowly defined brand commodities, observed in 76 countries -- we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the passthrough coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability. Some of these factors changed during the 1990s. Part (and only part) of the downward trend in passthrough to imported goods prices, and in turn to competitors' prices and the CPI, can be explained by changes in the monetary environment. Real wages also work to reduce passthrough to competitors' prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the passthrough coefficient in some developing countries. ER -