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Consumer search, price dispersion, and international relative price volatility

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  • George Alessandria

Abstract

This paper develops a model of consumer search consistent with the evidence of substantial price dispersion within countries. This model is used to study international relative price fluctuations. Consumer search frictions permit firms to price discriminate across markets based on the local wage of consumers. With price dispersion, the market price of a good does not measure its resource cost. This breaks the tight link between relative quantities and relative prices implied by most models. We show that volatile and persistent fluctuations in relative wages lead to volatile and persistent fluctuations in relative prices at the disaggregate level. These deviations from the law of one price substantially increase international relative price volatility. With productivity and taste shocks, the model generates international business cycles that closely match the data

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 05-9.

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Date of creation: 2005
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Handle: RePEc:fip:fedpwp:05-9

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Keywords: Prices ; Consumers;

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Cited by:
  1. Allen Head & Alok Kumar & Beverly Lapham, 2010. "Market Power, Price Adjustment, And Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 73-98, 02.
  2. Lukasz A. Drozd & Jaromir B. Nosal, 2008. "Understanding international prices: customers as capital," Staff Report 411, Federal Reserve Bank of Minneapolis.
  3. Drozd, Lukasz A. & Nosal, Jaromir B., 2010. "Pricing to Market in Business Cycle Models," MPRA Paper 22513, University Library of Munich, Germany.
  4. Thomas Y. Mathä & Olivier Pierrard, 2008. "Search in the product market and the real business cycle," BCL working papers 32, Central Bank of Luxembourg.
  5. Silvio Contessi, 2010. "How does multinational production change international comovement?," Working Papers 2010-041, Federal Reserve Bank of St. Louis.
  6. David M. Arseneau & Sanjay K. Chugh, 2007. "Bargaining, fairness, and price rigidity in a DSGE environment," International Finance Discussion Papers 900, Board of Governors of the Federal Reserve System (U.S.).

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