Authors: Pinelopi K. Goldberg and Rebecca Hellerstein

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 nominal price rigidities, 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.