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 frame-work for identifying the sources of local-currency price stability at each stage of the distribution chain. 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 nominal price rigidities, 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 microdata from the beer market