Pricing-to-Market in Business Cycle Models

Lukasz Drozd, Marcin Kolasa and Jaromir Nosal

Review of Economic Dynamics, 2026, vol. 60

Abstract: We evaluate several leading microfounded pricing-to-market (PTM) mechanisms embedded in a two-country DSGE model with volatile exchange rates driven by real and financial shocks. Across these frameworks, including the reduced-form Kimball specification, we identify a fundamental parameterization trilemma: models typically struggle to simultaneously match empirically plausible producer markups, muted expenditure switching (low short-run trade elasticity), and the low exchange-rate pass-through needed to account for the business-cycle dynamics of prices and quantities. We provide an analytical characterization of this trilemma and quantitatively assess each model’s performance vis-à -vis a unified set of empirical benchmarks. (Copyright: Elsevier)

Keywords: Exchange-rate pass-through; pricing-to-market; real rigidity; international comovements (search for similar items in EconPapers)
JEL-codes: E32 F31 F41 (search for similar items in EconPapers)
Date: 2026
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Software Item: Code and data files for "Pricing-to-Market in Business Cycle Models" (2026)
Working Paper: Online Appendix to "Pricing-to-Market in Business Cycle Models" (2026)
Working Paper: Pricing To Market In Business Cycle Models (2012)
Working Paper: Pricing to Market in Business Cycle Models (2010)
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DOI: 10.1016/j.red.2026.101333

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