Advanced Search
MyIDEAS: Login to save this paper or follow this series

Macroeconomics of International Price Discrimination

Contents:

Author Info

  • Giancarlo CORSETTI
  • Luca DEDOLA

Abstract

This paper builds a baseline two-country model of real and monetary transmission in the presence of optimal international price discrimination by firms. Distributing traded goods to consumers requires nontradables, intensive in local labor. Because of distribution services, the price elasticity of demand is country-specific and depends on exchange-rate fluctuations. Hence, within limits dictated by the possibility of arbitrage, profit-maximizing monopolistic firms drive a wedge between prices across countries at both wholesale and retail level. Optimal price discrimination results in a muted response of import and consumer prices to exchange-rate movements. Despite low pass-through, a currency depreciation generally worsens the terms of trade, consistent with the possibility of expenditure-switching e.ects. We use our model to derive general equilibrium expressions for the exchange-rate pass-through as a function of fundamentals. Conditional pass-through varies depending on whether shocks are real or nominal, transitory or permanent, thus suggesting caution in deriving structural interpretations from average, unconditional estimates of price elasticities.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.iue.it/PUB/ECO2003-20.pdf
File Function: main text
Download Restriction: no

Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2003/20.

as in new window
Length:
Date of creation: 2003
Date of revision:
Handle: RePEc:eui:euiwps:eco2003/20

Contact details of provider:
Postal: Badia Fiesolana, Via dei Roccettini, 9, 50016 San Domenico di Fiesole (FI) Italy
Phone: +39-055-4685.982
Fax: +39-055-4685.902
Web page: http://www.eui.eu/ECO/
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
  2. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
  3. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  4. Charles Engel, 2002. "Expenditure Switching and Exchange Rate Policy," NBER Working Papers 9016, National Bureau of Economic Research, Inc.
  5. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers, Stockholm University, Institute for International Economic Studies 638, Stockholm University, Institute for International Economic Studies.
  6. Bacchetta, Philippe & Van Wincoop, Eric, 2002. "A theory of the currency denomination of international trade," Working Paper Series 0177, European Central Bank.
  7. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  8. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  9. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Working Papers 96-02, University of Washington, Department of Economics.
  10. Bennett T. McCallum & Edward Nelson, 2000. "Nominal Income Targeting in an Open-Economy Optimizing Model," NBER Working Papers 6675, National Bureau of Economic Research, Inc.
  11. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, Elsevier, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977 Elsevier.
  12. Michael Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibiity," Working Papers 0016, University of Washington, Department of Economics.
  13. Cedric Tille, 2002. "How valuable is exchange rate flexibility? Optimal monetary policy under sectoral shocks," Staff Reports 147, Federal Reserve Bank of New York.
  14. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report, Federal Reserve Bank of Minneapolis 277, Federal Reserve Bank of Minneapolis.
  15. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Orientated National Monetary Rules," CEPR Discussion Papers 2856, C.E.P.R. Discussion Papers.
  16. Burstein, Ariel T. & Neves, Joao C. & Rebelo, Sergio, 2003. "Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(6), pages 1189-1214, September.
  17. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
  18. Knetter, Michael M, 1993. "International Comparisons of Price-to-Market Behavior," American Economic Review, American Economic Association, vol. 83(3), pages 473-86, June.
  19. Giancarlo Corsetti & Paolo Pesenti, 2001. "International Dimensions of Optimal Monetary Policy," NBER Working Papers 8230, National Bureau of Economic Research, Inc.
  20. Pinelopi Koujianou Goldberg & Frank Verboven, 1998. "The Evolution of Price Dispersion in the European Car Market," NBER Working Papers 6818, National Bureau of Economic Research, Inc.
  21. David K. Backus & Gregor W. Smith, 1993. "Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods," Working Papers, Queen's University, Department of Economics 1252, Queen's University, Department of Economics.
  22. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 28(1), pages 3-24, August.
  23. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
  24. Robert Feenstra & Paul Bergin, 2003. "Pricing To Market, Staggered Contracts, And Real Exchange Rate Persistence," Working Papers 991, University of California, Davis, Department of Economics.
  25. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Price Stability as a Nash Equilibrium in Monetary Open-Economy Models," CEPR Discussion Papers 2757, C.E.P.R. Discussion Papers.
  26. Ronald MacDonald & Luca Ricci, 2001. "PPP and the Balassa Samuelson Effect: the Role of the Distribution Sector," CESifo Working Paper Series 442, CESifo Group Munich.
  27. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series, Federal Reserve Bank of Chicago WP-01-08, Federal Reserve Bank of Chicago.
  28. Jordi Gali & Tommaso Monacelli, 1999. "Optimal Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Boston College Working Papers in Economics 438, Boston College Department of Economics, revised 15 Nov 1999.
  29. Joseph E. Gagnon & Michael M. Knetter, 1992. "Markup Adjustment and Exchange Rate Fluctuations: Evidence From Panel Data on Automobile Exports," NBER Working Papers 4123, National Bureau of Economic Research, Inc.
  30. Parsley, David C. & Wei, Shang-Jin, 2001. "Explaining the border effect: the role of exchange rate variability, shipping costs, and geography," Journal of International Economics, Elsevier, vol. 55(1), pages 87-105, October.
  31. Heathcote, Jonathan & Perri, Fabrizio, 1999. "Financial Autarky and International Business Cycles," Working Paper Series in Economics and Finance 320, Stockholm School of Economics, revised 30 Apr 2000.
  32. Corsetti, Giancarlo & Dedola, Luca, 2002. "Macroeconomics of international price discrimination," Working Paper Series 0176, European Central Bank.
  33. Ronald MacDonald & Luca Antonio Ricci, 2001. "PPP and the Balassa Samuelson Effect," IMF Working Papers 01/38, International Monetary Fund.
  34. Ben S. Bernanke & Kenneth Rogoff, 2001. "Editorial in "NBER Macroeconomics Annual 2000, Volume 15"," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 1-4 National Bureau of Economic Research, Inc.
  35. Svensson, Lars E O, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey: Comment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 435-38.
  36. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  37. Sutherland, Alan, 2001. "Inflation Targeting in a Small Open Economy," CEPR Discussion Papers 2726, C.E.P.R. Discussion Papers.
  38. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
  39. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: A Quantitative Investigation," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9614, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  40. Devereux, Michael B & Engel, Charles M, 2000. "Monetary Policy In The Open Economy Revisited: Price Setting Rules And Exchange Rate Flexibility," CEPR Discussion Papers 2454, C.E.P.R. Discussion Papers.
  41. Dornbusch, Rudiger, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 401-32.
  42. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  43. Michael B. Devereux & Charles Engel, 2001. "Endogenous Currency of Price Setting in a Dynamic Open Economy Model," NBER Working Papers 8559, National Bureau of Economic Research, Inc.
  44. Robert Miguel W. K. Kollman, 1997. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities," IMF Working Papers 97/7, International Monetary Fund.
  45. Corsetti, Giancarlo & Pesenti, Paolo, 2002. "Self-Validating Optimum Currency Areas," CEPR Discussion Papers 3220, C.E.P.R. Discussion Papers.
  46. Puumanen, Kari, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 433-34.
  47. Knetter, Michael M, 1989. "Price Discrimination by U.S. and German Exporters," American Economic Review, American Economic Association, vol. 79(1), pages 198-210, March.
  48. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
  49. Betts, Caroline & Devereux, Michael B., 2000. "Erratum to "Exchange rate dynamics in a model of pricing-to-market": [Journal of International Economics 50 (2000) 214-244]," Journal of International Economics, Elsevier, vol. 52(1), pages 207-208, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eui:euiwps:eco2003/20. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marcia Gastaldo).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.