Date Added: Oct 2010
Product replacement is frequent in the micro-data that underlie U.S. import and export price indexes, while price changes are infrequent. Consequently, for about 40% of products in the data, no price changes are observed, and for roughly 70%, two price changes or less are observed. In constructing price indexes, price changes that occur at the time of product replacements tend to be dropped. The authors show that this biases aggregate price indexes towards being too smooth. Quantitatively, they show that this "Product replacement bias" leads to a large bias in the measured long-run "Pass-through" of the exchange rate into import and export price indexes.