A Structural Approach to Identifying the Sources of Local-Currency Price Stability / Pinelopi K. Goldberg, Rebecca Hellerstein.

Format:

Book

Author/Creator:

Goldberg, Pinelopi K.

Contributor:

National Bureau of Economic Research.

Hellerstein, Rebecca.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13183.

NBER working paper series no. w13183

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

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.

Notes:

Print version record

June 2007.