A framework for identifying the sources of local-currency price stability with an empirical application

"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 fixed costs of repricing, 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 micro data from the beer market. We find that: (a) wholesale prices appear more rigid than retail prices; (b) price adjustment costs account on average for up to 0.5% of revenue at the wholesale level, but only 0.1% of revenue at the retail level; (c) overall, 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"--National Bureau of Economic Research web site.