Macroeconomics of International Price Discrimination

Giancarlo Corsetti and Luca Dedola ()

No 3710, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper builds a baseline two-country model of real and monetary transmission in the presence of optimal international price discrimination by firms. Distributing traded goods to consumers requires non-tradables, intensive in local labour. Because of distributive trade the price elasticity of demand depends on country-specific shocks to productivity and the exchange rate. Hence, within limits dictated by the possibility of arbitrage, profit-maximizing monopolistic firms drive a wedge between prices across countries at both wholesale and retail level. Optimal pricing thus results in possibly large deviations from the law of one price and incomplete pass-through on import prices. Consistent with the received wisdom on international transmission, nominal and real depreciations worsens the terms of trade. In general, the nominal and real exchange rate are more volatile than fundamentals, and large movements in the international prices translate into small changes in consumption, employment and the price level. Finally, we provide an example showing that international policy cooperation may be redundant even when asset trading is ruled out, despite incomplete pass-through and less than optimal risk sharing.

Keywords: Wholesale and retail prices; International cooperation; Exchange rate pass-through; Nominal rigidities (search for similar items in EconPapers)
JEL-codes: F30 F40 (search for similar items in EconPapers)
Date: 2003-01
New Economics Papers: this item is included in nep-ifn, nep-ind and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (55)

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Related works:
Journal Article: A macroeconomic model of international price discrimination (2005)
Working Paper: Macroeconomics of International Price Discrimination (2003)
Working Paper: Macroeconomics of international price discrimination (2002)
Working Paper: Macroeconomics of international price discrimination (2002)
Working Paper: Macroeconomics of international price discrimination (2002)
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