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Pricing-to-Market (PTM) and the International Monetary Policy Transmission: The "New Open-Economy Macroeconomics" Approach

  • Otani, Akira

    (Institute for Monetary & Econ Studies, Bank of Japan)

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    Empirical analyses of firms' Price-setting behavior show that while the exchange rate pass-through of Japanese firms is low (many Japanese firms adopt pricing-to-market [PTM]), the export prices charged by U.S. firms nearly perfectly reflect foreign exchange rate fluctuations. This paper analyzes how the difference in domestic and foreign firms' price-setting behavior affects the domestic and international transmission of monetary policy by using a model that explicitly incorporates differences in the price-setting behavior of domestic and foreign firms. This model is constructed by adopting the framework of the "hew open-economy macroeconomics" that has been the subject of numerous research papers an recent years. The findings demonstrate that the effects of domestic and foreign monetary policies differ greatly when domestic and foreign firms adopt different price-setting behaviors. This indicates that central banks have to give sufficient attention to firms' price-setting behavior for the implementation of monetary policies. Additionally, model simulations based on Japan and U.S. data show that the external effect of Japanese monetary policy is negligible compared with that of U. S. monetary policy due to the PTM-price-setting behavior of Japanese firms.

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    File URL: http://www.imes.boj.or.jp/research/papers/english/me20-3-1.pdf
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    Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

    Volume (Year): 20 (2002)
    Issue (Month): 3 (October)
    Pages: 1-34

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    Handle: RePEc:ime:imemes:v:20:y:2002:i:3:p:1-34
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    1. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
    2. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
    3. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    4. Maurice Obstfeld & Kenneth Rogoff, 2000. "New Directions for Stochastic Open Economy Models," International Finance 0004002, EconWPA.
    5. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    6. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
    7. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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