Pricing-To-Market and International Business Cycle
Empirical evidence suggest that nominal shocks play a major role in explaining real exchange rate fluctuations. I thus develop a two-country monopolistic competition model with nominal impulses, adjustement costs and price discrimination. I gauge the ability of the model to solve the quantity puzzle and the price puzzle. Indeed, nominal rigidities, monetary impulses and market segmentation are key ingredients for solving the price anomaly and the quantity anomaly. However, I find that, in that kind of model, there is a trade off between replicating the cross country correlations of output and consumption and accounting for the variability of the real exchange rate.
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