Macroeconomics of international price discrimination

Giancarlo Corsetti and Luca Dedola

No 176, Working Paper Series from European Central Bank

Abstract: This paper builds a baseline two-country model of real and monetary transmission under optimal international proce discrimination. Distributing traded goods to consumers reuires nontradables; because of distributive trade, the proce elasticity of export demand depends on the exchange rate. Profit-maximizing monopolistic firms drive a wedge between wholesale and retial proces across countries. This entails possibly large deviations from the law of one price and incomplete pass-through on import prices. Yet, consistent with expenditure-switching effects, a nominal repreciation generally worsens the terms of trade. Moreover, the exchange rate and the terms of trade can be more volatile than fundamentals. For plausible ranges of the distribution margin, there can be multiple steady states, whereas large differences in nominal and real exhange rates across equilibria translate into small differences in consumption, employment and the price level. Finally, we show that with competitive goods markets international policy cooperation is redundant even under financial autarky. JEL Classification: F3, F4

Keywords: exchange rate pass-through; international cooperation; nominal rigidities; optimal cyclical monetary policy; wholesale and retail services (search for similar items in EconPapers)
Date: 2002-09
Note: 80922
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Citations: View citations in EconPapers (60)

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Related works:
Working Paper: Macroeconomics of International Price Discrimination (2003)
Working Paper: Macroeconomics of International Price Discrimination (2003)
Working Paper: Macroeconomics of international price discrimination (2002)
Working Paper: Macroeconomics of international price discrimination (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2002176

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