Price setting, imperfect information, and the law of one price

Betty C. Daniel ()

Journal of Macroeconomics, 1992, vol. 14, issue 3, pages 383-415

Abstract: This paper uses a two-country model to investigate the effects of price-setting behavior, with menu costs, imperfect information, and flexible exchange rates, on deviations from the law of one price. When last minute price revision is costly, and when the variances of real and nominal disturbances are similar such that the information content of financial variables is low, then firms might choose not to adjust domestic currency and foreign currency prices to signals from observable financial variables. When a subset of prices adjusts, the most likely candidates are export prices. However, the adjustment will fall short of that needed for the law of one price.

Date: 1992

Downloads: (external link)
http://www.sciencedirect.com/science/article/B6X4M ... bc31e9c8f342841dabc3
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eee:jmacro:v:14:y:1992:i:3:p:383-415

Access Statistics for this article

Journal of Macroeconomics is edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Series data maintained by Heidi Boesdal ().