IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/13183.html
   My bibliography  Save this paper

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

Author

Listed:
  • Pinelopi K. Goldberg
  • Rebecca Hellerstein

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 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.

Suggested Citation

  • Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "A Structural Approach to Identifying the Sources of Local-Currency Price Stability," NBER Working Papers 13183, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13183
    Note: IFM IO ITI
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w13183.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Kehoe, Patrick & Midrigan, Virgiliu, 2015. "Prices are sticky after all," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 35-53.
    3. Victor Aguirregabiria, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 275-308.
    4. Levy, Daniel & Bergen, Mark & Dutta, Shantanu & Venable, Robert, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 112(3), pages 791-824.
    5. Pinelopi Koujianou Goldberg & Frank Verboven, 2001. "The Evolution of Price Dispersion in the European Car Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(4), pages 811-848.
    6. Dotsey, Michael & King, Robert G., 2005. "Implications of state-dependent pricing for dynamic macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 213-242, January.
    7. Charles Engel, 2003. "Expenditure Switching and Exchange-Rate Policy," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 231-300, National Bureau of Economic Research, Inc.
    8. Emi Nakamura & Dawit Zerom, 2010. "Accounting for Incomplete Pass-Through," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(3), pages 1192-1230.
    9. Margaret E. Slade & G.R.E.Q.A.M., 1998. "Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(1), pages 87-107.
    10. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    11. 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.
    12. Burstein, Ariel T. & Neves, Joao C. & Rebelo, Sergio, 2003. "Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1189-1214, September.
    13. 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.
    14. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284, Elsevier.
    15. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 625-652.
    16. John Asker, 2004. "Diagnosing Foreclosure Due to Exclusive Dealing," Working Papers 04-36, New York University, Leonard N. Stern School of Business, Department of Economics.
    17. Avinash Dixit, 1991. "Analytical Approximations in Models of Hysteresis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 141-151.
    18. 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.
    19. 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.
    20. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    21. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
    22. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
    23. Aviv Nevo & Konstantinos Hatzitaskos, 2005. "Why Does the Average Price of Tuna Fall During Lent?," NBER Working Papers 11572, National Bureau of Economic Research, Inc.
    24. Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "Sticky prices: why firms hesitate to adjust the price of their goods," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 13(Nov).
    25. Peter J. Klenow & Jonathan L. Willis, 2016. "Real Rigidities and Nominal Price Changes," Economica, London School of Economics and Political Science, vol. 83(331), pages 443-472, July.
    26. Igal Hendel & Aviv Nevo, 2006. "Measuring the Implications of Sales and Consumer Inventory Behavior," Econometrica, Econometric Society, vol. 74(6), pages 1637-1673, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2006. "A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application," 2006 Meeting Papers 625, Society for Economic Dynamics.
    2. repec:pri:cepsud:185goldberg is not listed on IDEAS
    3. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2006. "A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application," 2006 Meeting Papers 625, Society for Economic Dynamics.
    4. Emi Nakamura & Dawit Zerom, 2010. "Accounting for Incomplete Pass-Through," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(3), pages 1192-1230.
    5. Hellerstein, Rebecca & Villas-Boas, Sofia B., 2010. "Outsourcing and pass-through," Journal of International Economics, Elsevier, vol. 81(2), pages 170-183, July.
    6. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1445-1488, December.
    7. Lein, Sarah Marit & Beck, Günter W., 2015. "Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113144, Verein für Socialpolitik / German Economic Association.
    8. Celine Bonnet & Pierre Dubois & Sofia B. Villas Boas & Daniel Klapper, 2013. "Empirical Evidence on the Role of Nonlinear Wholesale Pricing and Vertical Restraints on Cost Pass-Through," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 500-515, May.
    9. Martin O'Connell & Pierre Dubois & Rachel Griffith, 2022. "The Use of Scanner Data for Economics Research," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 723-745, August.
    10. Stella, Andrea, 2020. "Economies of scope in price setting: A moment inequalities estimation," Journal of Monetary Economics, Elsevier, vol. 110(C), pages 50-61.
    11. Andrea Stella, 2014. "The Magnitude of Menu Costs: A Structural Estimation," 2014 Meeting Papers 436, Society for Economic Dynamics.
    12. Rebecca Hellerstein, 2005. "A Decomposition of the Sources of Incomplete Cross-Border Transmission," 2005 Meeting Papers 805, Society for Economic Dynamics.
    13. Sofia Berto Villas‐Boas, 2009. "An empirical investigation of the welfare effects of banning wholesale price discrimination," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 20-46, March.
    14. 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.
    15. Auer, Raphael A. & Schoenle, Raphael S., 2016. "Market structure and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 98(C), pages 60-77.
    16. Beck, Günter W. & Lein, Sarah M., 2020. "Price elasticities and demand-side real rigidities in micro data and in macro models," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 200-212.
    17. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
    18. Tenn, Steven & Yun, John M., 2008. "Biases in demand analysis due to variation in retail distribution," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 984-997, July.
    19. Bonnet, Céline & Réquillart, Vincent, 2013. "Tax incidence with strategic firms in the soft drink market," Journal of Public Economics, Elsevier, vol. 106(C), pages 77-88.
    20. Berck, Peter & Brown, Jennifer & Perloff, Jeffrey M & Villas-Boas, Sofia B., 2007. "Sales: Tests of Theories on Causality and Timing," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt2g56n1jk, Department of Agricultural & Resource Economics, UC Berkeley.
    21. Emi Nakamura & Jón Steinsson, 2013. "Price Rigidity: Microeconomic Evidence and Macroeconomic Implications," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 133-163, May.

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F10 - International Economics - - Trade - - - General
    • F30 - International Economics - - International Finance - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13183. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.