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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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    File URL: https://dx.doi.org/10.1016/j.red.2022.202333
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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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