Product Quality and International Price Dynamics

Marta Arespa () and Diego Gruber
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Marta Arespa: Universitat de Barcelona
Diego Gruber: Kernel Analytics

No 2016/340, UB School of Economics Working Papers from University of Barcelona School of Economics

Abstract: Two puzzling facts of international real business cycles are 1) weak or negative correlations between the terms of trade and output, and 2) a rise in relative consumption for countries where national goods become relatively more expensive. We show these puzzles either vanish or become much weaker in recent data. We propose a new mechanism that generates endogenous international price movements that are consistent with both the "old" and the "new" facts. In this mechanism, firms operating in a monopolistically competitive environment adjust price and quality of their products in response to technological shocks. This model is consistent with the old facts if price levels are not adjusted for quality. Instead, if quality adjustments to price level are introduced, the model's properties are in line with the new facts.

Keywords: Quality; International Real Business Cycle; Ba kus- Smith puzzle; Hedoni Prices. (search for similar items in EconPapers)
JEL-codes: E31 F44 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mkt
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Persistent link: https://EconPapers.repec.org/RePEc:ewp:wpaper:340web

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