NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Lost in Transit: Product Replacement Bias and Pricing to Market

Emi Nakamura, Jón Steinsson

NBER Working Paper No. 15359
Issued in September 2009
NBER Program(s):   EFG   IFM   ME   PR

The microdata underlying U.S. import and export price indexes exhibit frequent product turnover and highly rigid prices. As a consequence, 40% of products are replaced before a single price change is observed and 70% are replaced after two price changes or less. An aggregate price index that focuses on price changes for identical items over time 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 U.S. microdata on import and export prices. We show that, accounting for product replacement bias, long-run exchange rate "pass-through" into U.S. import and export price indexes is almost twice as high as conventional estimates suggest, and changes in the terms of trade are roughly 75% more volatile. Our adjustment makes pass-through statistics easier to account for with existing general equilibrium models.

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This paper was revised on December 5, 2011

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Published: Emi Nakamura & J�n Steinsson, 2012. "Lost in Transit: Product Replacement Bias and Pricing to Market," American Economic Review, American Economic Association, vol. 102(7), pages 3277-3316, December.

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