Macroeconomics of International Price Discrimination

62 Pages Posted: 16 May 2003

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

University of Cambridge; University of Rome III - Department of Economics; Centre for Economic Policy Research (CEPR)

Luca Dedola

Bank of Italy; European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2002

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: Exchange rate pass-through, wholesale and retail services, nominal rigidities, optimal cyclical monetary policy, international cooperation

JEL Classification: F3, F4

Suggested Citation

Corsetti, Giancarlo and Dedola, Luca, Macroeconomics of International Price Discrimination (September 2002). ECB Working Paper No. 176; FRB International Finance Discussion Paper No. 744, Available at SSRN: https://ssrn.com/abstract=358141

Giancarlo Corsetti (Contact Author)

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Luca Dedola

Bank of Italy ( email )

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Rome, 00184
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European Central Bank (ECB) ( email )

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