Working Paper: NBER ID: w1552
Authors: Joshua Aizenman
Abstract: The purpose of this paper is to explain deviations from PPP in an economy charaterived by a mononolistic competitive market structure in which pricing decisions incur costs. That lead producers to pre-set the price path for several periods. The paper derives an optimal pricing rule, including the optimal pre-setting horizon. It does so for a rational expectation equilibrium, characterized by staggered, unsynchronized price setting, for which the degree of staggering is endogenously determined. The discussion focuses on the critical role of the degree of domestic-foreign goods substitutability in explaining observable deviations from PPP.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monopolistic competition (L12) | deviations from purchasing power parity (PPP) (F31) |
| pricing decisions (L11) | deviations from purchasing power parity (PPP) (F31) |
| degree of substitutability of domestic and foreign goods (F49) | deviations from purchasing power parity (PPP) (F31) |
| volatility of the exchange rate (F31) | effective duration of intermediate run deviations from PPP (F31) |
| degree of substitutability of domestic and foreign goods (F49) | presetting horizon (Y20) |
| presetting horizon (Y20) | price staggering (D49) |
| price staggering (D49) | deviations from purchasing power parity (PPP) (F31) |