TY  - JOUR
AU  - Goldberg,Pinelopi K.
AU  - Hellerstein,Rebecca
TI  - A Structural Approach to Identifying the Sources of Local-Currency Price Stability
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13183
PY  - 2007
Y2  - June 2007
UR  - http://www.nber.org/papers/w13183
L1  - http://www.nber.org/papers/w13183.pdf
N1  - Author contact info:
Pinelopi K. Goldberg
Yale University
Department  of Economics
37 Hillhouse Ave.
P.O. Box 208264
New Haven, CT 06520-8264
E-Mail: penny.goldberg@yale.edu

Rebecca Hellerstein
International Research
Federal Reserve Bank of New York
33 Liberty Street
New York, NY  10045
E-Mail: Rebecca.Hellerstein@ny.frb.org
AB  - 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.
ER  -