Pricing-to-Market in Business Cycle Models

Lukasz Drozd, Marcin Kolasa and Jaromir B. Nosal

No 26-31, Working Papers from Federal Reserve Bank of Philadelphia

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.

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)
Pages: 93
Date: 2026-06-30
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Journal Article: Pricing-to-Market in Business Cycle Models (2026)
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DOI: 10.21799/frbp.wp.2026.31

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