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Pricing to Market in Business Cycle Models

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  • Drozd, Lukasz A.
  • Nosal, Jaromir B.
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    Abstract

    This paper evaluates the performance of leading micro-founded pricing-to-market frictions vis-a-vis a set of robust stylized facts about international prices. In order to make that evaluation meaningful, we embed each friction into a unified IRBC framework and parameterize the models in a uniform way. Our goal is to evaluate the broad-based applicability of these frictions for policy-oriented DSGE modeling by documenting their strengths and weaknesses. We make three points: (i) the mechanisms generating pricing to market are not always neutral to business cycle dynamics of quantities, (ii) some mechanisms require producer markups at least 50% to account for the full range of estimates of the empirical exchange rate pass-through to export prices of 35%-50%, (iii) some frictions crucially depend on a particular driver of uncertainty in the underlying model.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22513.

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    Date of creation: 17 Mar 2010
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    Handle: RePEc:pra:mprapa:22513

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    Related research

    Keywords: pricing to market; law of one price; incomplete pass-through; international correlations; international business cycle; sticky prices; pass-through coefficient;

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    1. Morten O. Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2006. "Pricing to Habits and the Law of One Price," Economics Working Papers ECO2006/40, European University Institute.
    2. George Alessandria, 2005. "Consumer search, price dispersion, and international relative price volatility," Working Papers 05-9, Federal Reserve Bank of Philadelphia.
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