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Author:Betts, C.
Devereux, M. B.
Title:The exchange rate in a model of pricing-to-market
Journal:European Economic Review
1996 : APR, VOL. 40:3-5, p. 1007-1021
Index terms:PRICING
MARKETS
EXCHANGE RATES
PURCHASING
PURCHASING POWER PARITY
Language:eng
Abstract:According to recent evidence suggestions , exchange rate movements have very little effect on prices of traded goods. The paper presents some new evidence on the phenomenon, and develops a general equilibrium model consistent with the non-response of prises to exchange rate movements that are generated by money shocks. In the model some firms engage in pricing-to-market (or PTM) across countries. The main question addressed is the degree to which PTM itself affects the behaviour of the exchange rate. It is shown that the presence of PTM combined with sticky local-currency nominal prices magnifies the response of the exchange rate to money shocks, and that the degree of exchange rate variability may be increased considerably relative to a model where the law of one price holds continuosly.
SCIMA record nr: 156117
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