International price dispersion in state-dependent pricing models

Virgiliu Midrigan

doi:10.1016/j.jmoneco.2007.06.022

International price dispersion in state-dependent pricing models

Virgiliu Midrigan

Research output: Contribution to journal › Article › peer-review

Abstract

Menu-cost models predict a hump-shaped relationship between real and nominal exchange rate volatility. The hump occurs at higher values of nominal exchange rate volatility, the higher trade costs and lower international substitution elasticities are. These predictions accord well with the negative relationship between relative price and nominal exchange rate volatility I document using a data set of prices collected in Eastern Europe in a volatile environment. In contrast, trade costs must be sufficiently high or international substitution elasticities low in order for the model to account for the positive correlation between real and nominal exchange rate volatility in the aggregate data.

Original language	English (US)
Pages (from-to)	2231-2250
Number of pages	20
Journal	Journal of Monetary Economics
Volume	54
Issue number	8
DOIs	https://doi.org/10.1016/j.jmoneco.2007.06.022
State	Published - Nov 2007

Keywords

Law of one price
Menu costs
PPP
Trade costs

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.jmoneco.2007.06.022

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AB - Menu-cost models predict a hump-shaped relationship between real and nominal exchange rate volatility. The hump occurs at higher values of nominal exchange rate volatility, the higher trade costs and lower international substitution elasticities are. These predictions accord well with the negative relationship between relative price and nominal exchange rate volatility I document using a data set of prices collected in Eastern Europe in a volatile environment. In contrast, trade costs must be sufficiently high or international substitution elasticities low in order for the model to account for the positive correlation between real and nominal exchange rate volatility in the aggregate data.

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KW - Trade costs

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International price dispersion in state-dependent pricing models

Abstract

Keywords

ASJC Scopus subject areas

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