Journal Article

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

Pinelopi Koujianou Goldberg and Rebecca Hellerstein

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 80, issue 1, pages 175-210
Published in print January 2013 | ISSN: 0034-6527
Published online March 2012 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rds015
A Structural Approach to Identifying the Sources of Local Currency Price Stability

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  • Manufacturing
  • Market Structure, Firm Strategy, and Market Performance
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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: Exchange rate pass-through; Pricing to market; Local currency price stability; Demand estimation; F3; L1; L66

Journal Article.  19793 words.  Illustrated.

Subjects: Manufacturing ; Market Structure, Firm Strategy, and Market Performance ; International Finance

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