Rate Pass-through Research Articles

Trade Elasticities in General Equilibrium: Demand, Supply, and Aggregation

Abstract We develop a general equilibrium model of international trade that incorporates imperfect factor mobility, product entry, and external returns to scale into a unified framework. The effects from these microeconomic channels can be summarized by two composite elasticities that govern supply and aggregation. We structurally derive export supply and import demand curves, develop a heteroskedastic estimator, and estimate supply, aggregation, and demand elasticities across international product markets. Employing our estimated model, we evaluate the impact of recent US protectionist policies and highlight the importance of our estimates and general equilibrium effects for tariff passthrough rates and cross-industry employment reallocations.

New-Tenant Rent Passthrough and the Future of Rent Inflation

New-tenant rent inflation rose sharply during the COVID-19 pandemic, subsequently falling. Concomitantly, consumer price index (CPI) tenant rent, which measures rent increases for both new and continuing renters, rose more gradually and, after falling somewhat, has remained elevated. To illustrate why CPI rent inflation has remained elevated, we combine a measure of new-tenant rents and annual renter mobility rates to create a simulated CPI tenant rent inflation measure. We use this simulation to define a "rent gap" that represents the difference between actual CPI tenant rent inflation and rent inflation we would observe if every tenant experienced new-tenant rent inflation. This gap has declined since hitting its peak at the end of 2022 but remains high, implying that existing rents for continuing renters may still be notably below new-tenant rent levels and that rent inflation may remain elevated. However, the future path remains uncertain because it depends on future mobility rates, future passthrough rates, and future new-tenant rent inflation.

Widening the price gap: the effect of the Netherlands' 2020 tax increase on tobacco prices.

The public health impact of a tobacco tax increase depends on the extent to which the industry passes the increase onto consumers, also known as tax-pass through. In 2020, the Netherlands announced tax increases aimed to increase the retail price by €1 per 20 factory-made cigarettes and €2.50 per 50 grams of roll-your-own tobacco. This study examines the pass-through rate after the tax increase, and whether this differed by type of tobacco and brand segment. Self-reported prices of 117 tobacco brand varieties (cigarettes=72, roll-your-own=45) pre- and post-tax increase were extracted from the 2020 International Tobacco Control (ITC) Netherlands Surveys (n=2959 respondents). We calculated the tax pass-through rate per variant, examining differences between type of tobacco and brand segments. On average, cigarette prices increased by €1.12 (SD=0.49) (112% of €1) and roll-your-own prices by €2.53 (SD=0.60) (101% of €2.50). Evidence of differential shifting across segments was found, with evidence of overshifting in non-discount varieties. The average price of discount varieties increased with €0.20 less than non-discount varieties. Similarly, the net-of-tax price decreased in discount varieties (cigarettes=-€0.02; roll-your-own=-€0.05), but increased in non-discount varieties (cigarettes= +€0.14; roll-your-own= +€0.20). Despite the large tax increase, the industry increased prices in line or above the required level. Through differential shifting, the price gap between discount and non-discount varieties has widened, which may reduce the public health impact of the tax increase. Measures aimed at reducing price variability should be strengthened in taxation policy, such as the European Tobacco Tax Directive. We found that the industry used differential shifting after a significant tobacco tax increase in the Netherlands. Prices increased more than required in higher-priced products, but not in lower-priced products. This pattern was found both for factory-made cigarettes and roll-your-own tobacco. Through differential shifting, the industry undermines the potential public health impact of tobacco tax increases, by offering a relatively cheaper alternative, which discourages people to quit or reduce consumption. The revision of the European Tobacco Tax Directive (TTD) provides an opportunity to address the widening price gap - both between and within product segments - across the European Union.

Exploring the sugar-sweetened beverage tax (SSBT) pass-through rate in the Irish hospitality sector

BackgroundThe World Health Organization (WHO) supports the use of Sugar-Sweetened Beverage Taxes (SSBTs) as a fiscal lever to help reduce sugar consumption and tackle obesity. Obesity is associated with a range of adverse health outcomes. In response to increasing levels of obesity in Ireland, an SSBT was introduced in 2018. Previous research in Ireland has noted that the pass-through rate of the SSBT in retail (off-site consumption) settings was poor. However, to date, no research has examined the SSBT pass-through rate in hospitality (on-site consumption) venues in Ireland.MethodsThis research examines the SSBT pass-through rate on Coca-Cola versus diet versions of Coca-Cola in a convenience sample of 100 hospitality venues in two provincial Irish cities.ResultsWilcoxon signed rank test analysis revealed that regular Coca-Cola was significantly more expensive compared to the price charged for diet versions of Coca-Cola. However, in 85.6% of cases the same price was charged for both full-sugar and sugar-free drinks. The mean pass-through rate of the SSBT was 33.8%.ConclusionThe effective functioning of the SSBT is premised on persistent price differences between soft drink prices based on sugar content. However, this is barely evident in the hospitality sector in Ireland. A number of recommendations are suggested, including both increasing the SSBT, and increasing it annually in line with inflation.

Was the German fuel discount passed on to consumers?

In this article, I analyze whether German gasoline stations passed on the gasoline tax reduction to consumers. I use a difference-in-differences approach with France as the control group, as well as data for all countries in the European Union. The German fuel discount was in effect from June to August 2022. As I am the first to use complete French and German high-frequency data for the entire treatment period, I can examine how the pass-through of the tax cut evolved over time, varied for different brands, and in various geographic regions. I find a substantial variance in pass-through rates over time and space. On average, the pass-through of the fuel discount was very high but remained incomplete for all fuel types. The pass-through rates were systematically lower in rural regions and in the south of Germany.

Impacts of carbon emissions allowance limitations on carbon price with power generation rights trading in China

Carbon pricing is a crucial mechanism for achieving carbon peaking and carbon neutrality through the carbon trading market. Recently, the price of carbon emissions allowances in China's national carbon market has shown a gradual upward trend. The limitations on carbon emissions allowances have also become increasingly stringent. Power generators, which primarily rely on thermal power generation, have a substantial demand for carbon emissions allowances. The rising prices and stricter carbon emissions constraints have increased operational costs. Therefore, exploring the carbon pricing mechanism under more stringent carbon emissions allowance constraints is vital. It encourages thermal power generators to engage in carbon trading and reduce carbon emissions. This paper focuses on an energy trading platform supply chain comprising three power generators, one energy trading platform, and one power retailer. We consider stringent carbon emissions constraints and power generation rights trading. Through the analysis of three scenarios, the study explores optimal pricing decisions for carbon emissions allowances to facilitate carbon emission reduction and promote renewable energy generation and consumption. The findings indicate that, under certain conditions (i.e., the carbon quotas allocation coefficient b1∈[0.73,0.8]), scenario 3, which excludes generation rights trading, yields the highest optimal carbon price. The energy trading platform can adjust various commissions to influence the carbon price, as well as the price and quantity of generation rights trading. Introducing power generation rights trading proves beneficial in reducing carbon emissions (nearly 400 tons less than that in scenario 3 without generation rights trading, when the realized total power demand is around 8600 MWh) and fostering renewable power generation and consumption (the actual renewable power consumption weight is 3% higher than that without generation rights trading). When considering generation rights trading, the high-emission generator and renewable power generator achieve the highest power profits, while for the low-emission generator, the profit in this case is the second best among these scenarios. Moreover, by decreasing the coefficient of carbon quotas allocation and increasing the reduction rate simultaneously, the carbon cost will pass through to the electricity price more sufficiently (e.g., when b1=0.76, the pass-through rate increases from 0.5015 to 0.7984), particularly within a specific range of the carbon quotas allocation coefficient.

Tax holidays and the heterogeneous pass-through of gasoline taxes

The pass-through of gasoline taxes to retail prices plays a vital role in determining the extent to which a fuel tax suspension policy provides financial relief to consumers. Given the increased interest in utilizing such “tax holidays” to mitigate the unprecedented rise of gasoline prices in 2022, it is important to obtain location-specific pass-through estimates that will inform future similar policy efforts. Using daily city-level data from a sample of 108 cities in 15 East Coast states and the District of Columbia during the period February 1, 2022-June 30, 2022, I estimate an average pass-through rate of gasoline taxes of 79%. My subsequent analysis reveals heterogeneity in pass-through across locations and explores supply constraints, market isolation, and spillover effects as possible contributing factors to this heterogeneity.

Mark Ups and Pass-Through in Small and Medium Retailers for Rice, Tomato Sauce and Oil

Abstract In this paper, we recover and decompose markups, and estimate the pass-through rates from cost to prices in small and medium retail stores for oil, tomato sauce, and rice in Uruguay using a structural model of demand and assumptions about the competitive behavior of producers. The market power for these products has been under study by the Commission of Promotion and Defense of Competition since 2016, and the proposed methodology allows for a deeper exploration of the measurement and understanding of the origin of that market power. In addition to providing a fundamental input for competition defense policies in Uruguay, this study enhances the international academic literature by contributing evidence on cost-to-price pass-through in a developing economy with potentially greater market power than that found in developed countries. About 65 % of the market power under the Nash Bertrand assumption is explained by the ability of firms to differentiate products and 35 % by the ownership structure in the case of oil and sauce. In the case of rice, 49 % is explained by differentiation and 51 % for ownership structure. Finally, the pass-through rates are low for the three products, being under both behavioral assumptions lower than 55 % for the three products.

Impact of supply risk on cost pass-through

ABSTRACT We study the cost pass-through rate in a supply chain setting where a buying firm sources from either a single unreliable supplier or dual unreliable suppliers. Numerous papers studying cost pass-through rates have assumed that supply is always certain and ample, which is not usually the case in practice. We find that the cost pass-through rate should depend on the supply uncertainty, its risk-sharing levels with upstream suppliers, and different sourcing strategies. In particular, the cost pass-through rate increases in supply risk-sharing levels, but decreases under single sourcing, compared to dual sourcing.

Double markups under bilateral vertical contracting

This paper examines price markups at the upstream and downstream levels of a bilateral vertical structure in which firms provide essential inputs to one another and engage in price competition in the downstream market. We show that the ratios of noncooperative equilibrium markups are primarily determined by the price elasticities of demand and the retail pass-through rates and, moreover, that coordination on input prices leads to a collusive equilibrium outcome in the final-product market.

Exchange Rate Pass - through in Export Value-chain of Bangladesh

Determining the extent and rate of the exchange rate pass-through (ERPT) to inflation has been of utmost importance to policy-makers in developed and emerging nations. This study uses mixed techniques to examine the exchange rate pass-through in Bangladesh using a data sample that spans the years 1990 to 2020. Comparison with India and Bhutan has been made in some aspects. The results show that the ERPT is significant, asymmetric, and rapid, with prices reflecting significant amount of changes in exchange rates in short run. Policy-makers should continue aiming for low and stable inflation and establish a strong track record of prudent macroeconomic policies in order for the ERPT to drop. This study uses a panel of data to investigate the exchange rate pass-through (ERPT) connection, which is the link between the exchange rate and the prices of traded products. The results of this analysis indicate that while there is evidence of a one-to-one connection between changes in the exchange rate and export prices for primary exports, this link is not present for ready-made garment (RMG) exports. Market-specific econometric estimates show that exporters' pass-through behaviour is influenced by their perception of the demand pattern in destination markets. As a result, pricing-to-market (PTM) emerges as the dominant strategy, defying the "law of one price" hypothesis' prediction. The Multi-fiber Arrangement (MFA) system, which limited the competitive activity of several providers in many restricted commodities that are of export importance to Bangladesh, is to be made responsible for the startling results that RMG exports are insensitive to fluctuations in the currency rate.

Evaluation of Changes in Prices and Purchases Following Implementation of Sugar-Sweetened Beverage Taxes Across the US

Sugar-sweetened beverage (SSB) taxes are promoted as key policies to reduce cardiometabolic diseases and other conditions, but comprehensive analyses of SSB taxes in the US have been difficult because of the absence of sufficiently large data samples and methods limitations. To estimate changes in SSB prices and purchases following SSB taxes in 5 large US cities. In this cross-sectional study with an augmented synthetic control analysis, changes in prices and purchases of SSBs were estimated following SSB tax implementation in Boulder, Colorado; Philadelphia, Pennsylvania; Oakland, California; Seattle, Washington; and San Francisco, California. Changes in SSB prices (in US dollars) and purchases (volume in ounces) in these cities in the 2 years following tax implementation were estimated and compared with control groups constructed from other cities. Changes in adjacent, untaxed areas were assessed to detect any increase in cross-border purchases. Data used for this analysis spanned from January 1, 2012, to February 29, 2020, and were analyzed between June 1, 2022, and September 29, 2023. The main outcomes were the changes in SSB prices and volume purchased. Using nutritional information, 5500 unique universal product codes were classified as SSBs, according to tax designations. The sample included 26 338 stores-496 located in treated localities, 1340 in bordering localities, and 24 502 in the donor pool. Prices of SSBs increased by an average of 33.1% (95% CI, 14.0% to 52.2%; P < .001) during the 2 years following tax implementation, corresponding to an average price increase of 1.3¢ per oz and a 92% tax pass-through rate from distributors to consumers. SSB purchases declined in total volume by an average of 33.0% (95% CI, -2.2% to -63.8%; P = .04) following tax implementation, corresponding to a -1.00 price elasticity of demand. The observed price increase and corresponding volume decrease immediately followed tax implementation, and both outcomes were sustained in the months thereafter. No evidence of increased cross-border purchases following tax implementation was found. In this cross-sectional study, SSB taxes led to substantial, consistent declines in SSB purchases across 5 taxed cities following price increases associated with those taxes. Scaling SSB taxes nationally could yield substantial public health benefits.

A study of carbon cost pass-through rate differences in the power generation industry

In the context of the operation of China’s carbon emissions trading market, carbon cost pass-through will profoundly impact the country’s power generation industry. However, the core of studying carbon cost pass-through in the power generation industry is determining the carbon cost pass-through rate (CCPTR). Based on this, this paper first takes the Cournot model as the basic principle, which analyzes the impact of different power generation enterprises’ numbers and the characteristics of electricity market demand on the carbon pass-through results. Secondly, based on the Cournot model, this paper further CCPTR under marginal cost variability. The research results show that when the demand function is linear, the larger the CCPTR, the larger the proportion of carbon cost pass-through. When the demand function is isoelastic, the smaller the CCPTR, the smaller the proportion of carbon cost pass-through.

Estimating the effects of E-cigarette taxes: a generalized synthetic control approach

ABSTRACT We examine the effects of e-cigarette tax policies on the sales quantities, prices, and sales revenues of e-cigarettes, cigarettes, and smoking cessation products (SCP). The data we use is weekly purchases from Nielsen Retail Scanner Data between 2011 and 2017. With a generalized synthetic control (GSC) identification strategy, we measure the average tax effects of multiple treated regions in various treated periods against the untreated control regions and the untreated periods. We reach an estimate of −3.567 for the own-price elasticity of e-cigarette demand and an estimate of 0.433 for the pass-through rate of e-cigarette taxes to price in all treated regions. Our results indicate that cigarettes and SCP are substitutes for e-cigarettes. We also discover that e-cigarette taxes show heterogeneous effects under different policy motivations, with the ad valorem taxes having a larger impact on e-cigarette demand.

Unraveling Producer Price Inflation Pass-Through: Quantification, Structural Breaks, and Causal Direction

Abstract Producer price inflation has long been considered a leading indicator for consumer price inflation. However, the evidence supporting the cost-push theory of inflation over extended periods is inconclusive and lacks direct quantification. To address this gap, we employ structural break and causality tests, regression analysis, and local projection impulse-response functions. Our analysis allows us to precisely identify instances when producer prices lead consumer prices and quantify short-run and long-run pass-through rates. We find relatively robust evidence of a producer price pass-through rate between 8 and 12%. However, there are significant periods where unidirectional pass-through does not hold. Local projections reveal that producer price pass-through is small but persistent in states where producer prices lead consumer prices, and larger but shorter-lived in states where there is no causal directionality. Our findings enhance the understanding of producer price pass-through to consumer inflation, providing valuable insights for policymakers and market participants interested in accurately forecasting and managing inflationary pressures.

VAT pass-through: the case of a large and permanent reduction in the market for menstrual hygiene products

AbstractThis paper examines the price effects of a VAT (value-added tax) reduction for menstrual hygiene products in Germany. Several aspects make this VAT reduction particularly interesting: the reduction is exogenous to economic conditions, the reduction was substantial and permanent, and demand can be assumed to be inelastic. We find that the VAT reduction was completely passed through to consumers. In fact, pass-through rates of significantly more than 100% can be observed. We find that the excess pass-through occurred in relatively competitive market segments, and that it is almost fully explained by retailers rounding down prices after the reduction.

An Empirical Research on the Impact of Gasoline Taxes on Consumer-Level Retail Prices

This paper uses provincial-level gasoline retail price data in Canada to study the effect of tax reform on gasoline retail prices. It uses a dynamic difference-in-difference strategy to estimate the dynamic treatment effect of tax reform to see the dynamic changes of treatment effect in post-reform periods. We find that on average, the tax cut tends to be close to or around the full passthrough rate to the gasoline retail price. The treatment effect does not diminish over time and it is immediate after the tax reform. This means that the gasoline tax cut goes directly to consumers, it will work as a great macroeconomic tool in fighting the current inflation. The implications of effective gasoline taxation policy allow governments to adjust the gasoline taxation when needed to fight off inflation knowing that almost full taxation changes would pass down to the retail level. We conducted an additional robustness check to the robustness of our results.

Flight ticket taxes in Europe: Environmental and economic impact

We examine the causal impact of flight ticket taxes on airline flights and derived CO2 emissions and analyse its distributional effects between airlines and travellers and within travellers. We use a dataset on flights within Europe at the airline-route level and apply a staggered difference-in-differences approach considering potential bias of the standard two-way fixed effects and the potential distorting effects of heterogeneities between treated and control routes. The main analysis focuses on low-cost airlines because connecting passengers are typically excluded from the tax. We find that flight ticket taxes have a significant overall effect on low-costs airlines supply and derived emissions: ticket taxes reduce the number of flights per airline-route by 12% on average compared to the counterfactual scenario, resulting in a 14% reduction in carbon emissions. In addition, we estimate a pricing equation using a quantile model to identify the cost pass-through rate over the distribution of the fare variable. The burden of the tax is higher for passengers paying low fares, so taxes have a stronger effect on avoidable flights with less added value and a smaller internalization of the total costs of flying.

Tax incidence for menthol cigarettes by race: Evidence from Nielsen Homescan data

We use Nielsen Homescan data to examine whether the incidence of cigarette taxes on menthol products varies with race. We find that taxes are shifted at significantly lower rates to Black smokers of menthol cigarettes than any other smokers. One possible explanation is that the industry targets price promotions to Black menthol smokers because they tend to be more responsive to cigarette prices relative to other smokers. We find evidence that Black smokers receive significantly more price discounts for menthol products than white menthol smokers. Our findings indicate that increasing cigarette taxes would effectively reduce menthol smoking among Black Americans because tax pass-through rate for Black menthol smokers is still substantially above zero.

Pass-through of temporary fuel tax reductions: Evidence from Europe

Several European countries have implemented temporary fuel tax reductions in 2022 to relieve the financial burden on their citizens. This paper is the first to provide estimates of the pass-through rates as well as the effect on retail margins for France and Italy. Further, it contributes to the recent literature on the fuel tax reduction in Germany. Using a unique data set containing daily consumer prices at service station chain level for gasoline and diesel, we employ a staggered Difference-in-Differences (DiD) design. Our main results imply that in the aggregate there was a full-shifting of the fuel tax reductions in all three countries. Nevertheless, in an event study design we find that the pass-through rates over time are heterogeneous between the countries and types of fuel. Depending on time, heterogeneous effects imply a full-shifting up to a minor over-shifting of the pass-through rates. These findings also have important implications for the effective design of unconventional fiscal policy as well as for competition policy in the fuel market.