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Pricing-to-Market in Business Cycle Models

Author

Listed:
  • Lukasz A. Drozd
  • Marcin Kolasa
  • Jaromir B. Nosal

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.

Suggested Citation

  • Lukasz A. Drozd & Marcin Kolasa & Jaromir B. Nosal, 2026. "Pricing-to-Market in Business Cycle Models," Working Papers 26-31, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:103462
    DOI: 10.21799/frbp.wp.2026.31
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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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