Slow Pass-through Around the World: A New Import for Developing Countries?

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Slow Pass-through Around the World: A New Import for Developing Countries?

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Title: Slow Pass-through Around the World: A New Import for Developing Countries?
Author: Frankel, Jeffrey A.; Parsley, David; Wei, Shang-jin

Note: Order does not necessarily reflect citation order of authors.

Citation: Frankel, Jeffrey A., David Parsley, and Shang-Jin Wei. "Slow Pass-through Around the World: A New Import for Developing Countries?" Open Economies Review 23.2 (April 2012): 213-251
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Abstract: Developing countries traditionally experience pass-through of exchange rate changes that is greater and more rapid than high-income countries experience. This is true equally of the determination of prices of imported goods, prices of local competitors’ products, and the general CPI. But developing countries in the 1990s experienced a rapid downward trend in the degree of pass-through and speed of adjustment, more so than did high-income countries. As a consequence, slow and incomplete pass-through 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 pass-through 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 pass-through to imported goods prices, and in turn to competitors’ prices and the CPI, can be explained by changes in the monetary environment—including a fall in long-term inflation. Real wages work to reduce pass-through 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 pass-through coefficient in some developing countries.
Published Version: http://dx.doi.org/10.1007/s11079-011-9210-8
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:10494212
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