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Effects of a mandatory local currency pricing law on the exchange rate pass-through

Renzo Castellares () and Hiroshi Toma

No 785, BIS Working Papers from Bank for International Settlements

Abstract: This paper discusses whether Law 28300 of 2004, that required Peruvian firms to express their prices in Peru's currency in a context of high price dollarization, affected the exchange rate pass-through (ERPT). We hypothesize that the enactment of the Law introduced menu costs for firms that used to set their prices in dollars, prompting several of them to make a permanent switch to pricing in local currency. Using disaggregated consumer price index (CPI) data, we find that, following passage of the Law, the ERPT was completely offset for non-durable goods with dollarized prices, and partially offset for durable goods with dollarized prices. These effects may vary due to differences in imported component shares, market power, and markup pricing.

Keywords: exchange-rate pass through; price dollarization; local currency pricing (search for similar items in EconPapers)
JEL-codes: D04 D49 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2019-05
New Economics Papers: this item is included in nep-mon
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