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Exchange Rates, Prices and International Trade in a Model of Endogenous Market Structure

  • Yunus Aksoy

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • Hanno Lustig

We suggest a new dynamic partial equilibrium approach that features product differentiation and endogenizes market structure at the same time. The model yields clear-cut predictions regarding the effects of small and large exchange rate shocks on the market structure, pass-through and international trade. First, we account for the asymmetric price adjustment process with respect to exchange rate shocks. Secondly, we discuss an array of conditions where short and long-run international monetary neutrality is violated. We present in detail under which conditions imperfect competition is able to generate persistent and volatile real exchange rate deviations. Most predictions survive alternative market configurations.

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File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0609.pdf
File Function: First version, 2006
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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0609.

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Date of creation: Oct 2006
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Handle: RePEc:bbk:bbkefp:0609
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