A Structural Approach to Identifying the Sources of Local Currency Price Stability
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.
Year of publication: |
2013
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Authors: | Goldberg, Pinelopi Koujianou ; Hellerstein, Rebecca |
Published in: |
Review of Economic Studies. - Oxford University Press. - Vol. 80.2013, 1, p. 175-210
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Publisher: |
Oxford University Press |
Saved in:
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