Reforms and the Real Exchange Rate: The Role of Pricing-to-Market

Lise Patureau () and Céline Poilly ()

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Abstract: The paper investigates how endogenous markups affect the extent to which policy reforms can influence international competitiveness. In a two-country model where trade costs allow for international market segmentation, we show that endogenous pricing-to-market behavior of firms acts as an important transmission channel of the policies. By strengthening the degree of competition between firms, product market deregulation at home leads to a reduction in domestic markups, which generally leads to an improvement in the international competitiveness of the Home country. Conversely, the power of competitive tax policy to depreciate the real exchange rate is dampened, as domestic firms take the opportunity of the labor tax cut to increase their markups. The variability of markups also affects the normative implications of the reforms. This indicates the importance of taking into account endogenous pricing-to-market behavior when intending to correctly evaluate the overall effects of the reforms.

Keywords: exchange rate; product market deregulation; fiscal reform; endogenous firm entry; pricing-to-market; endogenous markups (search for similar items in EconPapers)
Date: 2018-10
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01936854v1
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Related works:
Journal Article: Reforms and the real exchange rate: The role of pricing-to-market (2019)
Working Paper: Reforms and the real exchange rate: The role of pricing-to-market (2019)
Working Paper: Reforms and the Real Exchange Rate: The Role of Pricing-to-Market (2018)
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