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

We analyze whether a 2004 law requiring firms to express prices in the local currency in Peru, which had experienced a high degree of price dollarization, affected the exchange rate pass-through (ERPT).We hypothesize that the enactment of the law introduced menu costs for those firms that set their prices in dollars, prompting several of them to make a permanent switch from dollars to soles. Using disaggregated consumer price index (CPI) data, we find that after the enactment 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 could be due to different shares of the imported content, market power and varying mark-ups.