One sentence summary: There is evidence for heterogeneous pass-through of different shocks into different U.S. prices.
The corresponding academic paper by
Hakan Yilmazkuday is available as a
working paper here.
AbstractThis paper estimates the pass-through of different shocks into alternative U.S. prices that are important for policy makers. The results based on the implications of a structural vector autoregression model show that oil price pass-through (OPPT) into import prices and producer prices is about 11%, whereas OPPT into consumer prices is about 4%. Exchange rate pass-through (XRPT) into import prices is about 39%, while XRPT into producer prices is about 32%. XRPT into consumer prices is about 2%, although this is the only pass-through estimate that is statistically insignificant. Import price pass-through (IPPT) into producer prices is about 82%, whereas IPPT into consumer prices is about 18%. Producer price pass-through into consumer prices is about 34%. Regarding the importance of each pass-through measure, the volatility in import prices, producer prices and consumer prices are mostly explained by oil prices (by up to 55%), followed by import prices (by up to 19%), producer prices (by 7%), and exchange rates (by up to 6%).
Non-technical Summary
The prices in the U.S. economy are affected by several international shocks as well as domestic shocks. Understanding the effects of these shocks for alternative U.S. prices is essential for understanding the transmission channel of these shocks and thus for conducting optimal monetary policy. Within this context, this paper estimates the oil price pass-through and exchange rate pass-through into import prices, producer prices and consumer prices. The pass-through of import prices into producer prices and consumer prices as well as the pass-through of producer prices into consumer prices are also estimated.
The estimation is based on the implications of a structural vector autoregression model, where quarterly data on global oil prices, U.S. import prices, U.S. real gross domestic product (GDP), U.S. real imports, U.S. producer price index, U.S. consumer price index, the (shadow) federal funds rate, and the U.S. nominal effective exchange rate are used. The pass-through measures are estimated by using the cumulative impulse response (CIR) of U.S. prices following specific shocks, which are divided by CIR of the shock variable to consider the developments in that variable over time.
The corresponding results show that oil price pass-through into import prices and producer prices is about 11%, whereas oil price pass-through into consumer prices is about 4%. Exchange rate pass-through into import prices is about 39%, while exchange rate pass-through into producer prices is about 32%. Exchange rate pass-through into consumer prices is about 2%, although this is the only pass-through estimate that is statistically insignificant. Import price pass-through into producer prices is about 82%, whereas import price pass-through into consumer prices is about 18%. Producer price pass-through into consumer prices is about 34%. It is implied that the pass-through measures are highly different for alternative U.S. prices.
When we further investigate the importance of each pass-through measure based on the estimated forecast error variance decomposition measures, the volatility of import prices is mostly explained by oil prices with a contribution of about 54%, followed by exchange rates with a contribution of about 6%. The volatility of producer prices is mostly explained by oil prices with a contribution of about 55%, followed by import prices with a contribution of about 19%, and exchange rates with a contribution of about 6%. The volatility of consumer prices is mostly explained by oil prices with a contribution of about 55%, followed by import prices with a contribution of about 16%, producer prices with a contribution of about 7%, and exchange rates with a contribution of about 6%. It is implied that oil price shocks explain the lion's share of changes in U.S. prices.
The corresponding academic paper by Hakan Yilmazkuday is available as a working paper here.
