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

  • Pinelopi Koujianou Goldberg
  • Rebecca Hellerstein

    ()

    (International Research Federal Reserve Bank of New York)

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 frame-work for identifying the sources of local-currency price stability at each stage of the distribution chain. 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 nominal price rigidities, local-cost non-traded components, and markup adjustment by manufacturers and retailers in the incomplete transmission of exchange-rate changes to prices. The approach is applied to microdata from the beer market

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 625.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:625
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Jose Manuel Campa & Linda S. Goldberg, 2006. "Distribution margins, imported inputs, and the sensitivity of the CPI to exchange rates," Staff Reports 247, Federal Reserve Bank of New York.
  2. Martin Pesendorfer, 2002. "Retail Sales: A Study of Pricing Behavior in Supermarkets," The Journal of Business, University of Chicago Press, vol. 75(1), pages 33-66, January.
  3. Burstein, Ariel Tomas & Neves, Joao C & Rebelo, Sérgio, 2001. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization," CEPR Discussion Papers 2944, C.E.P.R. Discussion Papers.
  4. Dutta, Shantanu, et al, 1999. "Menu Costs, Posted Prices, and Multiproduct Retailers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 683-703, November.
  5. Villas-Boas, Sofia B., 2006. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0z26d2v9, Department of Agricultural & Resource Economics, UC Berkeley.
  6. Dennis W. Carlton, 1986. "The Rigidity of Prices," NBER Working Papers 1813, National Bureau of Economic Research, Inc.
  7. Victor Aguirregabiria, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 275-308.
  8. Charles Engel, 2004. "On the Relationship between Pass-Through and Sticky Nominal Prices," Working Papers 112004, Hong Kong Institute for Monetary Research.
  9. Charles Engel, 2002. "Expenditure Switching and Exchange Rate Policy," NBER Working Papers 9016, National Bureau of Economic Research, Inc.
  10. Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Research Reports 25164, University of Connecticut, Food Marketing Policy Center.
  11. Midrigan, Virgiliu, 2006. "Menu costs, multi-product firms, and aggregate fluctuations," CFS Working Paper Series 2007/13, Center for Financial Studies (CFS).
  12. Igal Hendel & Aviv Nevo, 2005. "Measuring the Implications of Sales and Consumer Inventory Behavior," NBER Working Papers 11307, National Bureau of Economic Research, Inc.
  13. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2008. "Inventories, lumpy trade, and large devaluations," Working Paper Series WP-08-07, Federal Reserve Bank of Chicago.
  14. Margaret E. Slade & G.R.E.Q.A.M., 1998. "Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 87-107.
  15. Igal Hendel & Aviv Nevo, 2006. "Sales and consumer inventory," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 543-561, 09.
  16. Pinelopi Koujianou Goldberg & Frank Verboven, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 811-848.
  17. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  18. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U. S. Supermarket Chains," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 791-824.
  19. Caplin, A. & Leahy, J., 1992. "Aggregation and Optimization with State-Dependent Pricing," Harvard Institute of Economic Research Working Papers 1595, Harvard - Institute of Economic Research.
  20. Emi Nakamura & Dawit Zerom, 2009. "Accounting for Incomplete Pass-Through," NBER Working Papers 15255, National Bureau of Economic Research, Inc.
  21. Martin Uribe & Morten O. Ravn & Stephanie Schmitt-Grohe, 2008. "Incomplete cost pass-through under deep habits," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  22. Pinelopi K. Goldberg & Frank Verboven, 2001. "Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market," NBER Working Papers 8402, National Bureau of Economic Research, Inc.
  23. Mario Crucini & Chris Telmer & Marios Zachariadis, . "Understanding European Real Exchange Rates," GSIA Working Papers 227, Carnegie Mellon University, Tepper School of Business.
  24. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  25. repec:rje:randje:v:37:y:2006:3:p:543-561 is not listed on IDEAS
  26. Sylvain Leduc & Giancarlo Corsetti & Luca Dedola, 2005. "Pass-Through and Exchange-Rate Fluctuations in a DSGE Model of Price," 2005 Meeting Papers 381, Society for Economic Dynamics.
  27. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  28. Rebecca Hellerstein, 2006. "A decomposition of the sources of incomplete cross-border transmission," Staff Reports 250, Federal Reserve Bank of New York.
  29. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
  30. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
  31. Villas-Boas, Sofia B. & Hellerstein, Rebecca, 2004. "Identification of supply models of retailer and manufacturer oligopoly pricing," CUDARE Working Paper Series 0993, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  32. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  33. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  34. Hellerstein, Rebecca, 2008. "Who bears the cost of a change in the exchange rate? Pass-through accounting for the case of beer," Journal of International Economics, Elsevier, vol. 76(1), pages 14-32, September.
  35. Andrew Caplin & John Leahy, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 683-708.
  36. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  37. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2005. "DSGE models of high exchange-rate volatility and low pass-through," International Finance Discussion Papers 845, Board of Governors of the Federal Reserve System (U.S.).
  38. Avinash Dixit, 1991. "Analytical Approximations in Models of Hysteresis," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 141-151.
  39. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
  40. Joel Sobel, 1984. "The Timing of Sales," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 353-368.
  41. Anil K Kashyap, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 245-274.
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