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Pricing-to-Market in Business Cycle Models

Author

Listed:
  • Lukasz Drozd

    (Federal Reserve Bank of Philadelphia)

  • Marcin Kolasa

    (International Monetary Fund)

  • Jaromir Nosal

    (Boston College)

Abstract

We evaluate several leading microfounded pricing-to-market (PTM) mechanisms embedded in a two-country DSGE model with volatile exchange rates driven by real and financial shocks. Across these frameworks, including the reduced-form Kimball specification, we identify a fundamental parameterization trilemma: models typically struggle to simultaneously match empirically plausible producer markups, muted expenditure switching (low short-run trade elasticity), and the low exchange-rate pass-through needed to account for the business-cycle dynamics of prices and quantities. We provide an analytical characterization of this trilemma and quantitatively assess each model’s performance vis-à -vis a unified set of empirical benchmarks. (Copyright: Elsevier)

Suggested Citation

  • Lukasz Drozd & Marcin Kolasa & Jaromir Nosal, 2026. "Pricing-to-Market in Business Cycle Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 60, April.
    • Handle: RePEc:red:issued:25-178
    DOI: 10.1016/j.red.2026.101333
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    2. Michael Dotsey & Margarida Duarte, 2017. "How Important is the Currency Denomination of Exports in Open Economy Models?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 1-18, January.
    3. Dudley Cooke, 2014. "Pricing-to-market and optimal interest rate policy," Globalization Institute Working Papers 187, Federal Reserve Bank of Dallas.
    4. Dudley Cooke, 2019. "Consumer Search, Incomplete Exchange Rate Pass‐Through, and Optimal Interest Rate Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(2-3), pages 455-484, March.
    5. Jacob, Punnoose & Uusküla, Lenno, 2019. "Deep habits and exchange rate pass-through," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 67-89.
    6. Imura, Yuko & Shukayev, Malik, 2019. "The extensive margin of trade and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 417-441.
    7. Yuko Imura, 2013. "Endogenous Trade Participation with Incomplete Exchange Rate Pass-Through," Staff Working Papers 13-30, Bank of Canada.
    8. Crucini, Mario J. & Davis, J. Scott, 2016. "Distribution capital and the short- and long-run import demand elasticity," Journal of International Economics, Elsevier, vol. 100(C), pages 203-219.
    9. Pennings, Steven, 2017. "Pass-through of competitors' exchange rates to US import and producer prices," Journal of International Economics, Elsevier, vol. 105(C), pages 41-56.

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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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