State-dependent pricing, local-currency pricing, and exchange rate pass-through

• Published in: Journal of economic dynamics & control Vol. 34; no. 10; pp. 1859 - 1871
• Main Author: Landry, Anthony
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.10.2010; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Economic Dynamics and Control
• Subjects: Business cycles; Economic models; Economic shock; Exchange rate pass-through; Exchange rates; Foreign exchange rates; General economic equilibrium; International business cycle; International business cycle State-dependent pricing Local-currency pricing Exchange rate pass-through; Local-currency pricing; Monetary economics; Monetary policy; Price level; Price models; Pricing; Pricing policies; State-dependent pricing; Studies; Transmission mechanism; Exchange rate pass-through; F41; F42; International business cycle; Local-currency pricing; State-dependent pricing
• ISSN: 0165-1889; 1879-1743
• DOI: 10.1016/j.jedc.2010.06.008

This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. (1999) in which firms discriminate across countries by setting prices in local currency. In this model, a domestic monetary expansion has greater spillover effects to foreign prices and foreign economic activity than an otherwise identical model with time-dependent pricing. In addition, the predictions of the state-dependent pricing model match the business-cycle moments better than the predictions of the time-dependent pricing model when driven by monetary policy shocks.