International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on U.S.–China Trade

Abstract

The interaction between the exchange rate regime, trade firms' price-setting behavior, and exchange rate pass-through (ERPT) is an important topic in international economics. This paper studies this using a goods-level dataset of US-China trade prices collected by the US Bureau of Labor Statistics. We document that the duration of US-China trade prices has declined almost 30% since China abandoned its hard peg to the US dollar in June 2005. A benchmark menu cost model that is calibrated to the data can replicate the documented decrease in price stickiness. We also estimate ERPT of RMB appreciation into US import prices between 2005 and 2008. Goods-level data allows us to estimate that the lifelong ERPT is close to one for goods that have at least one price change, but less than one-half when all goods are included. This finding can be attributed to the fact that around 40% of the goods in never experience a price change, and supports the hypothesis that price changes that take the form of product replacements may bias ERPT estimates downwards.