Working Paper

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

Abstract: This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey, King, and Wolman (1999) in which firms price-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.

JEL Classification: F41; F42;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2009

Number: 39

Pages: 28 pages

Note: Published as: Landry, Anthony (2010), "State-Dependent Pricing, Local-Currency Pricing, and Exchange Rate Pass-Through," Journal of Economic Dynamics and Control 34 (10): 1859-1871.