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Reforms and the real exchange rate: The role of pricing-to-market

Author

Listed:
  • Lise Patureau

    (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)

  • Céline Poilly

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

The paper investigates how endogenous markups affect the extent to which policy reforms can influence international competitiveness. In a two-country model where trade costs allow for international market segmentation, we show that endogenous pricing-to-market behavior of firms acts as an important transmission channel of the policies. By strengthening the degree of competition between firms, product market deregulation at home leads to a reduction in domestic markups, which generally leads to an improvement in the international competitiveness of the Home country. Conversely, the power of competitive tax policy to depreciate the real exchange rate is dampened, as domestic firms take the opportunity of the labor tax cut to increase their markups. The variability of markups also affects the normative implications of the reforms. This indicates the importance of taking into account endogenous pricing-to-market behavior when intending to correctly evaluate the overall effects of the reforms.

Suggested Citation

  • Lise Patureau & Céline Poilly, 2019. "Reforms and the real exchange rate: The role of pricing-to-market," Post-Print hal-02194106, HAL.
  • Handle: RePEc:hal:journl:hal-02194106
    Note: View the original document on HAL open archive server: https://hal-amu.archives-ouvertes.fr/hal-02194106
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    References listed on IDEAS

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    More about this item

    Keywords

    Pricing-to-market; Product market deregulation; Fiscal reform; Endogenous firm entry; Exchange rate; Endogenous Markups;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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