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

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.

[1]  Virgiliu Midrigan.  Menu Costs, Multi-Product Firms and Aggregate Fluctuations , 2011 .

[2]  D. Zerom,et al.  Accounting for Incomplete Pass-Through , 2009 .

[3]  S. Leduc,et al.  High exchange-rate volatility and low pass-through , 2008 .

[4]  S. Villas-Boas.  Vertical relationships between Manufacturers and Retailers: Inference with Limited Data , 2007 .

[5]  Stephanie Schmitt-Grohé,et al.  Incomplete Cost Pass-Through Under Deep Habits , 2007 .

[6]  J. Perloff,et al.  Effect of Sales on Brand Loyalty , 2006 .

[7]  Rebecca Hellerstein.  A Decomposition of the Sources of Incomplete Cross-Border Transmission , 2006 .

[8]  S. Leduc,et al.  DSGE Models of High Exchange-Rate Volatility and Low Pass-Through , 2005 .

[9]  H. Nath,et al.  SMALL MENU COSTS AND LARGE BUSINESS CYCLES: AN EXTENSION OF THE MANKIW MODEL , 2005 .

[10]  Mario J. Crucini,et al.  Understanding European Real Exchange Rates , 2005 .

[11]  S. Villas-Boas,et al.  Identification of Supply Models of Retailer and Manufacturer Oligopoly Pricing , 2004 .

[12]  Rebecca Hellerstein,et al.  Who Bears the Cost of a Change in the Exchange Rate , 2004 .

[13]  C. Engel,et al.  On the Relationship between Pass-Through and Sticky Nominal Prices , 2004 .

[14]  C. Engel.  Expenditure Switching and Exchange Rate Policy , 2002 .

[15]  Martin Pesendorfer.  Retail sales: a study of pricing behavior in supermarkets , 2002 .

[16]  I. Hendel,et al.  Sales and Consumer Inventory , 2001 .

[17]  Frank Verboven,et al.  Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market , 2001 .

[18]  Shantanu Dutta,et al.  Menu costs, posted prices, and multiproduct retailers , 1999 .

[19]  Victor Aguirregabiria.  THE DYNAMICS OF MARKUPS AND INVENTORIES IN RETAILING FIRMS , 1999 .

[20]  Frank Verboven,et al.  The Evolution of Price Dispersion in the European Car Market , 1998 .

[21]  A. Blinder,et al.  Asking About Prices: A New Approach to Understanding Price Stickiness , 1998 .

[22]  Aviv Nevo.  Measuring Market Power in the Ready-to-Eat Cereal Industry , 1998 .

[23]  M. Bergen,et al.  The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains , 1997 .

[24]  M. Knetter,et al.  Goods Prices and Exchange Rates: What Have We Learned? , 1996 .

[25]  P. Goldberg.  Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry , 1995 .

[26]  Steven T. Berry,et al.  Automobile Prices in Market Equilibrium , 1995 .

[27]  A. Kashyap,et al.  Sticky Prices: New Evidence from Retail Catalogs , 1994 .

[28]  Steven T. Berry.  Estimating Discrete-Choice Models of Product Differentiation , 1994 .

[29]  Andrew Caplin,et al.  State-Dependent Pricing and the Dynamics of Money and Output , 1991 .

[30]  J. Richardson,et al.  Real-Financial Linkages Among Open Economies , 1987 .

[31]  P. Krugman,et al.  Pricing to Market When the Exchange Rate Changes , 1986 .

[32]  N. Gregory Mankiw,et al.  Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly , 1985 .

[33]  Joel Sobel,et al.  The Timing of Sales , 1984 .

[34]  Joseph P. Kaboski,et al.  Lumpy Trade and Large Devaluations , 2007 .

[35]  P. Kehoe,et al.  Sales and the real effects of monetary policy , 2007 .

[36]  Andrew Caplin,et al.  Aggregation and Optimization with State-Dependent Pricing Author ( s ) : , 2007 .

[37]  John Asker.  Measuring Advantages from Exclusive Dealing , 2004 .

[38]  M. Slade.  Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices , 1998 .

[39]  Andrew Caplin,et al.  AGGREGATION AND OPTIMIZATION WITH STATE-DEPENDENT PRICING , 1997 .

[40]  Avinash Dixit,et al.  Analytical Approximations in Models of Hysteresis , 1991 .

[41]  Olivier J. Blanchard,et al.  Monopolistic Competition and the Effects of Aggregate Demand , 1987 .

[42]  D. Carlton,et al.  The Rigidity of Prices , 1986 .

[43]  Janet L. Yellen,et al.  A Near-Rational Model of the Business Cycle , 1985 .

[44]  H. Varian.  A Model of Sales , 1980 .

[45]  Joseph P. Kaboski,et al.  Federal Reserve Bank of San Francisco Working Paper Series Inventories, Lumpy Trade, and Large Devaluations Inventories, Lumpy Trade, and Large Devaluations * , 2022 .