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International Price Dispersion in State-Dependent Pricing Models

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  • Virgiliu Midrigan

    (Ohio State University)

Abstract

Studies of disaggregated international price data document a robust, positive relationship between nominal exchange (NER) volatility and the variability of international relative prices. This relationship is interpreted as evidence that sticky prices rather than trade frictions are the source of the large law of one price deviations across locations. This paper shows that an explicitly micro-founded, menu-cost model predicts a hump-shaped rather than a monotonic relationship between relative price and nominal exchange rate volatility. The hump occurs at higher nominal exchange rate volatilities the less tradeable the goods are. We use this implication of the model to identify the size of the physical barriers that separate nations. Ad valorem trade costs as large as 50 percent are necessary for the model to generate the type of international relative price movements observed in the data.

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File URL: http://128.118.178.162/eps/if/papers/0511/0511001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0511001.

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Length: 49 pages
Date of creation: 01 Nov 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0511001

Note: Type of Document - pdf; pages: 49
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Web page: http://128.118.178.162

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Keywords: PPP; Law of One Price; menu costs; trade costs;

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Cited by:
  1. Murase, Koichi, 2013. "Asymmetric effects of the exchange rate on domestic corporate goods prices," Japan and the World Economy, Elsevier, vol. 25, pages 80-89.
  2. Mina Kim & Deokwoo Nam & Jian Wang & Jason Wu, 2013. "International Trade Price Stickiness and Exchange Rate and Pass-Through in Micro Data: A Case Study on US-China Trade," Working Papers 202013, Hong Kong Institute for Monetary Research.
  3. Kazuko Kano & Takashi Kano & Kazutaka Takechi, 2012. "Exaggerated Death of Distance: Revisiting Distance Effects on Regional Price Dispersions," Global COE Hi-Stat Discussion Paper Series gd12-245, Institute of Economic Research, Hitotsubashi University.
  4. Gita Gopinath & Oleg Itskhoki, 2010. "Frequency of Price Adjustment and Pass-Through," The Quarterly Journal of Economics, MIT Press, vol. 125(2), pages 675-727, May.
  5. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
  6. Magda Kandil, 2010. "Demand shocks and the cyclical behavior of the real wage: Some international evidence," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 135-158, May.
  7. Anthony E. Landry, 2006. "Expectations and exchange rate dynamics: a state-dependent pricing approach," Working Papers 0604, Federal Reserve Bank of Dallas.
  8. Mina Kim, & Deokwoo Nam, & Jian Wang & Jason Wu,, 2013. "International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on US-China Trade," Working Papers 467, U.S. Bureau of Labor Statistics.
  9. Stefan Ried, 2009. "Putting Up a Good Fight: The Galí-Monacelli Model versus “The Six Major Puzzles in International Macroeconomics”," SFB 649 Discussion Papers SFB649DP2009-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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