Macroeconomics of international price discrimination

Giancarlo Corsetti and Luca Dedola ()

No 744, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper builds a baseline two-country model of real and monetary transmission under optimal international price discrimination. Distributing traded goods to consumers requires nontradables; because of distributive trade, the price elasticity of export demand depends on the exchange rate. Profit-maximizing monopolistic firms drive a wedge between wholesale and retail prices 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 depreciation 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 exchange 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.

Keywords: Foreign exchange rates; International economic relations (search for similar items in EconPapers)
Date: 2002
New Economics Papers: this item is included in nep-ifn and nep-ind
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Citations: View citations in EconPapers (42)

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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:fip:fedgif:744

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