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Macroeconomics of international price discrimination

Author

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  • Giancarlo Corsetti

    (University of Rome III, Yale University and CEPR)

  • Luca Dedola

    (Banca d'Italia)

Abstract

This paper builds a baseline two-country model of real and monetary transmission in the presence of optimal international price discrimination by firms. Distributing traded goods to consumers requires nontradables, intensive in local labor. Because of distributive trade the price elasticity of demand depends on country-specific shocks to productivity and the exchange rate. Hence, within limits dictated by the possibility of arbitrage, profit-maximizing monopolistic firms drive a wedge between prices across countries at both wholesale and retail level. Optimal pricing thus results in possibly large deviations from the law of one price and incomplete pass-through on import prices. Consistent with the received wisdom on international transmission, nominal and real depreciations worsens the terms of trade. In general, the nominal and real exchange rate are more volatile than fundamentals, and large movements in the international prices translate into small changes in consumption, employment and the price level. Finally, we provide an example showing that international policy cooperation may be redundant even when asset trading is ruled out, despite incomplete pass-through and less than optimal risk sharing.

Suggested Citation

  • Giancarlo Corsetti & Luca Dedola, 2002. "Macroeconomics of international price discrimination," Temi di discussione (Economic working papers) 461, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_461_02
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    exchange rate pass-through; wholesale and retail prices; nominal rigidities; international cooperation;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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