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International Price Dispersion in State-Dependent Pricing Models

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  • Virgiliu Midrigan

    (Ohio State University)

Abstract

Studies of disaggregated international price data document a robust, positive relationship between nominal exchange (NER) volatility and the variability of international relative prices. This relationship is interpreted as evidence that sticky prices rather than trade frictions are the source of the large law of one price deviations across locations. This paper shows that an explicitly micro-founded, menu-cost model predicts a hump-shaped rather than a monotonic relationship between relative price and nominal exchange rate volatility. The hump occurs at higher nominal exchange rate volatilities the less tradeable the goods are. We use this implication of the model to identify the size of the physical barriers that separate nations. Ad valorem trade costs as large as 50 percent are necessary for the model to generate the type of international relative price movements observed in the data.

Suggested Citation

  • Virgiliu Midrigan, 2005. "International Price Dispersion in State-Dependent Pricing Models," International Finance 0511001, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0511001
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    References listed on IDEAS

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    Cited by:

    1. Mina Kim, & Deokwoo Nam, & Jian Wang & Jason Wu,, 2013. "International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on US-China Trade," Working Papers 467, U.S. Bureau of Labor Statistics.
    2. Stefan Ried, 2009. "Putting Up a Good Fight: The Galí-Monacelli Model versus “The Six Major Puzzles in International Macroeconomicsâ€," SFB 649 Discussion Papers SFB649DP2009-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Murase, Koichi, 2013. "Asymmetric effects of the exchange rate on domestic corporate goods prices," Japan and the World Economy, Elsevier, vol. 25, pages 80-89.
    4. Kano, Kazuko & Kano, Takashi & Takechi, Kazutaka, 2013. "Exaggerated death of distance: Revisiting distance effects on regional price dispersions," Journal of International Economics, Elsevier, vol. 90(2), pages 403-413.
    5. Landry, Anthony, 2009. "Expectations and exchange rate dynamics: A state-dependent pricing approach," Journal of International Economics, Elsevier, vol. 78(1), pages 60-71, June.
    6. Gita Gopinath & Oleg Itskhoki, 2010. "Frequency of Price Adjustment and Pass-Through," The Quarterly Journal of Economics, Oxford University Press, vol. 125(2), pages 675-727.
    7. Marina Glushenkova & Andros Kourtellos & Marios Zachariadis, 2016. "Barriers to price convergence," University of Cyprus Working Papers in Economics 02-2016, University of Cyprus Department of Economics.
    8. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
    9. Magda Kandil, 2010. "Demand shocks and the cyclical behavior of the real wage: Some international evidence," Journal of Applied Economics, Universidad del CEMA, vol. 13, pages 135-158, May.
    10. repec:hrv:faseco:30703806 is not listed on IDEAS
    11. Mina Kim & Deokwoo Nam & Jian Wang & Jason Wu, 2013. "International Trade Price Stickiness and Exchange Rate and Pass-Through in Micro Data: A Case Study on US-China Trade," Working Papers 202013, Hong Kong Institute for Monetary Research.
    12. Burstein, Ariel & Gopinath, Gita, 2014. "International Prices and Exchange Rates," Handbook of International Economics, Elsevier.

    More about this item

    Keywords

    PPP; Law of One Price; menu costs; trade costs;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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