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A framework for identifying the sources of local currency price stability with an empirical application

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  • Pinelopi K. Goldberg
  • Rebecca Hellerstein

Abstract

The inertia of traded goods' local currency prices in the face of exchange rate changes is a well-documented phenomenon in the field of 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, to quantify the relative importance of fixed costs of repricing, local-cost nontraded components, and markup adjustment by manufacturers and retailers in the incomplete transmission of exchange rate changes to prices. The approach is applied to micro data from the beer market. We find that (a) wholesale prices appear more rigid than retail prices; (b) price adjustment costs on average account for up to 0.5 percent of revenue at the wholesale level but only 0.1 percent of revenue at the retail level; (c) overall, 54.1 percent of the incomplete exchange rate pass-through is due to local nontraded costs, 33.7 percent to markup adjustment, and 12.2 percent to the existence of price adjustment costs.

Suggested Citation

  • Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "A framework for identifying the sources of local currency price stability with an empirical application," Staff Reports 287, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:287
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    References listed on IDEAS

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    Cited by:

    1. Alfredo Pistelli & Víctor Riquelme, 2010. "Auge y caída de precios de commodities y su impacto sobre precios domésticos: Comparación internacional," Working Papers Central Bank of Chile 567, Central Bank of Chile.
    2. Bernardo Guimaraes & Kevin D. Sheedy, 2011. "Sales and Monetary Policy," American Economic Review, American Economic Association, vol. 101(2), pages 844-876, April.
    3. Thomas A. Eife, 2008. "Do Menu Costs Make Prices Sticky?," Working Papers 0477, University of Heidelberg, Department of Economics, revised Oct 2008.
    4. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. "Optimal Monetary Policy in Open Economies," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933 Elsevier.
    5. Nakamura, Emi & Zerom, Dawit, 2008. "Accounting for Incomplete Pass-Through," MPRA Paper 14389, University Library of Munich, Germany.
    6. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2007. "Optimal Monetary Policy and the Sources of Local-Currency Price Stability," NBER Chapters,in: International Dimensions of Monetary Policy, pages 319-367 National Bureau of Economic Research, Inc.
    7. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2010. "Inventories, Lumpy Trade, and Large Devaluations," American Economic Review, American Economic Association, vol. 100(5), pages 2304-2339, December.
    8. Bonnet, Céline & Requillart, Vincent, 2010. "Is The Eu Sugar Policy Reform Likely To Increase Obesity?," 115th Joint EAAE/AAEA Seminar, September 15-17, 2010, Freising-Weihenstephan, Germany 116414, European Association of Agricultural Economists;Agricultural and Applied Economics Association.
    9. Mirko Abbritti, 2012. "Product Market Frictions, Bargaining and Pass-Through," Faculty Working Papers 19/12, School of Economics and Business Administration, University of Navarra.
    10. Mirko Abbritti & Tommaso Trani, 2014. "Search and Bargaining in the Product Market and Price Rigidities," Faculty Working Papers 09/14, School of Economics and Business Administration, University of Navarra.
    11. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2008. "A Structural Approach to Explaining Incomplete Exchange-Rate Pass-Through and Pricing-to-Market," American Economic Review, American Economic Association, vol. 98(2), pages 423-429, May.
    12. Philippe Jeanfils, 2008. "Imperfect exchange rate pass-through : the role of distribution services and variable demand elasticity," Working Paper Research 135, National Bank of Belgium.
    13. Emi Nakamura & Jón Steinsson, 2012. "Lost in Transit: Product Replacement Bias and Pricing to Market," American Economic Review, American Economic Association, vol. 102(7), pages 3277-3316, December.
    14. Kei-Mu Yi, 2010. "Can Multistage Production Explain the Home Bias in Trade?," American Economic Review, American Economic Association, vol. 100(1), pages 364-393, March.
    15. Boivin, Jean & Clark, Robert & Vincent, Nicolas, 2012. "Virtual borders," Journal of International Economics, Elsevier, vol. 86(2), pages 327-335.
    16. repec:hrv:faseco:30703806 is not listed on IDEAS
    17. Yuko Imura, 2013. "Endogenous Trade Participation with Incomplete Exchange Rate Pass-Through," Staff Working Papers 13-30, Bank of Canada.
    18. Zhi Yu, 2013. "Exchange rate pass-through, firm heterogeneity and product quality: a theoretical analysis," Globalization and Monetary Policy Institute Working Paper 141, Federal Reserve Bank of Dallas.
    19. Virgiliu Midrigan, 2011. "Comment on "In Search of Real Rigidities"," NBER Chapters,in: NBER Macroeconomics Annual 2010, Volume 25, pages 319-325 National Bureau of Economic Research, Inc.
    20. Waldyr Areosa & Marta Areosa, 2012. "The Signaling Effect of Exchange Rates: pass-through under dispersed information," Working Papers Series 282, Central Bank of Brazil, Research Department.
    21. Imura, Yuko, 2016. "Endogenous trade participation with price rigidities," Journal of International Economics, Elsevier, vol. 100(C), pages 14-33.

    More about this item

    Keywords

    Foreign exchange rates ; Prices ; Beer industry ; Wholesale price indexes ; International trade;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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