Effects of a Mandatory Local Currency Pricing Law on the Exchange Rate Pass-Through

37 Pages Posted: 17 Jun 2019

See all articles by Renzo Castellares

Renzo Castellares

Central Reserve Bank of Peru

Hiroshi Toma

Central Reserve Bank of Peru

Date Written: June 4, 2019

Abstract

This paper discusses whether Law 28300 of 2004, that required Peruvian firms to express their prices in Peru's currency in a context of high price dollarization, affected the exchange rate pass-through (ERPT). We hypothesize that the enactment of the Law introduced menu costs for firms that used to set their prices in dollars, prompting several of them to make a permanent switch to pricing in local currency. Using disaggregated consumer price index (CPI) data, we find that, following passage of the Law, the ERPT was completely offset for non-durable goods with dollarized prices, and partially offset for durable goods with dollarized prices. These effects may vary due to differences in imported component shares, market power, and markup pricing.

Keywords: exchange-rate pass through, price dollarization, local currency pricing

JEL Classification: D04, D49

Suggested Citation

Castellares, Renzo and Toma, Hiroshi, Effects of a Mandatory Local Currency Pricing Law on the Exchange Rate Pass-Through (June 4, 2019). BIS Working Paper No. 785, Available at SSRN: https://ssrn.com/abstract=3400782

Renzo Castellares (Contact Author)

Central Reserve Bank of Peru ( email )

Jirón Miroquesada 441
Lima, Lima 1
Peru

Hiroshi Toma

Central Reserve Bank of Peru ( email )

Jirón Miroquesada 441
Lima, Lima 1
Peru

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