International trade price stickiness and exchange rate pass-through in micro data: a case study on U.S.–China trade

Price-setting behavior of exporters and exchange rate pass-through (ERPT) are crucial issues in international macroeconomics. This paper studies these topics, using a novel dataset of goods-level US-China trade prices collected by the US Bureau of Labor Statistics. We document that the duration of U.S.–China trade prices has declined almost 30 percent since China began appreciating its currency in 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 U.S. import prices between 2005 and 2008. The lifelong ERPT is close to one for prices that have at least one change, while the pass-through is less than half when all goods are included. The difference in pass-through rates is a result of about one third of the goods never experiencing a price change.