Time-varying exchange rate pass-through into terms of trade

The U.S. invoices nearly all of its imports and exports in U.S. dollars. The U.S. terms of trade should therefore be “neutral” to movements in the U.S. dollar against other currencies. However, I find that the U.S. dollar pass-through into the U.S. terms of trade is: (i) on average positive and significant (31%); and (ii) it exhibits persistent time variation in the range of 10–60% over the period of 1990–2018. I argue that this can be explained by the changing primary commodity share in U.S. imports and the fact that commodity prices are invoiced, but not always “sticky”, in U.S. dollar terms. Without primary commodities, such as petroleum and crude oil, pass-through roughly halves and becomes relatively stable over time. Unlike trade in manufactured goods and services (i.e. non-commodities), trade in commodities thus preserves the conventional link between the exchange rate, terms of trade, and the current account.