A Structural Approach to Identifying the Sources of Local Currency Price Stability

Pinelopi Goldberg and Rebecca Hellerstein

The Review of Economic Studies, 2013, vol. 80, issue 1, 175-210

Abstract: The inertia of the local currency prices of traded goods in the face of exchange rate changes is a well-documented phenomenon in International Economics. This paper develops a structural model to identify the sources of this local currency price stability and applies it to micro-data from the beer market. The empirical procedure exploits manufacturers' and retailers' first-order conditions in conjunction with detailed information on the frequency of price adjustments following exchange rate changes to quantify the relative importance of local non-traded cost components, markup adjustment by manufacturers and retailers, and nominal price rigidities in the incomplete transmission of such changes to prices. We find that, on average, approximately 60% of the incomplete exchange rate pass-through is due to local non-traded costs; 8% to markup adjustment; 30% to the existence of own brand price adjustment costs; and 1% to the indirect/strategic effect of such costs, though these results vary considerably across individual brands according to their market shares. Copyright , Oxford University Press.

Date: 2013
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Working Paper: A Structural Approach to Identifying the Sources of Local-Currency Price Stability (2007)
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