Working Paper: NBER ID: w13183
Authors: Pinelopi K. Goldberg; Rebecca Hellerstein
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.
Keywords: local-currency price stability; exchange rate passthrough; markup adjustment; nominal price rigidities
JEL Codes: E30; F10; F30; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price rigidities (D43) | pricing behavior (D40) |
| local nontraded costs (H79) | incomplete exchange rate passthrough (F31) |
| markup adjustments (L11) | incomplete exchange rate passthrough (F31) |
| own-brand price adjustment costs (L11) | incomplete exchange rate passthrough (F31) |
| indirect strategic effect of price adjustment costs (L11) | incomplete exchange rate passthrough (F31) |
| exchange rate fluctuations (F31) | price stability (E31) |