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A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application

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  • Pinelopi Koujianou Goldberg

    (Princeton University, NBER, and BREAD)

  • Rebecca Hellerstein

    (Federal Reserve Bank of New York)

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 framework for identifying the sources of local-currency price stability. The empirical approach exploits manufacturers’ and retailers’ first-order conditions in conjunction with detailed information on the frequency of price adjustments in response to exchange-rate changes, in order to quantify the relative importance of markup adjustment by manufacturers and retailers, local-cost non-traded components, and nominal price rigidities, in the incomplete transmission of exchange-rate changes to prices. The approach is applied to micro data from the beer market. We find that on average, 54.1% of the incomplete exchange rate pass-through is due to local non-traded costs; 33.7% to markup adjustment; and 12.2% to the existence of price adjustment costs.

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Bibliographic Info

Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number 1161.

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Date of creation: Mar 2008
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Handle: RePEc:pri:cepsud:185goldberg

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Keywords: currency prices; exchange rates;

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