Macroeconomics of International Price Discrimination

47 Pages Posted: 14 Feb 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)

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Date Written: January 2003

Abstract

This Paper builds a baseline two-country model of real and monetary transmission in the presence of optimal international price discrimination by firms. Distributing traded goods to consumers requires non-tradables, intensive in local labour. Because of distributive trade the price elasticity of demand depends on country-specific shocks to productivity and the exchange rate. Hence, within limits dictated by the possibility of arbitrage, profit-maximizing monopolistic firms drive a wedge between prices across countries at both wholesale and retail level. Optimal pricing thus results in possibly large deviations from the law of one price and incomplete pass-through on import prices. Consistent with the received wisdom on international transmission, nominal and real depreciations worsens the terms of trade. In general, the nominal and real exchange rate are more volatile than fundamentals, and large movements in the international prices translate into small changes in consumption, employment and the price level. Finally, we provide an example showing that international policy cooperation may be redundant even when asset trading is ruled out, despite incomplete pass-through and less than optimal risk sharing.

Keywords: Wholesale and retail prices, international cooperation, exchange rate pass-through, nominal rigidities

JEL Classification: F30, F40

Suggested Citation

Corsetti, Giancarlo and Dedola, Luca, Macroeconomics of International Price Discrimination (January 2003). CEPR Discussion Paper No. 3710. Available at SSRN: https://ssrn.com/abstract=378240

Giancarlo Corsetti (Contact Author)

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

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Rome, 00154
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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
Italy

European Central Bank (ECB) ( email )

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Frankfurt am Main, 60314
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