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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.

Suggested Citation

  • Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2008. "A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application," Working Papers 1161, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:185
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    More about this item

    Keywords

    currency prices; exchange rates;

    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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