International price dispersion in state-dependent pricing models

Virgiliu Midrigan

    Research output: Contribution to journalArticle

    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 languageEnglish (US)
    Pages (from-to)2231-2250
    Number of pages20
    JournalJournal of Monetary Economics
    Volume54
    Issue number8
    DOIs
    StatePublished - Nov 1 2007

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    Keywords

    • Law of one price
    • Menu costs
    • PPP
    • Trade costs

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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