Lost in Transit: Product Replacement Bias and Pricing to Market

This is the authors' abstract. We don't add key points for this paper.

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. (JEL F14, F31)