Federal Reserve Bank of San Francisco Working Paper Series Pricing-to-market, Trade Costs, and International Relative Prices Pricing-to-market, Trade Costs, and International Relative Prices *

Data on international relative prices from industrialized countries show large and systematic deviations from relative purchasing power parity. We embed a model of imperfect competition and variable markups in some of the recently developed quantitative models of international trade to examine whether such models can reproduce the main features of the fluctuations in international relative prices. We find that when our model is parameterized to match salient features of the data on international trade and market structure in the US, it reproduces deviations from relative purchasing power parity similar to those observed in the data because firms choose to price-to-market. We then examine how pricing-to-market depends on the presence of international trade costs and various features of market structure. and three anonymous referees for very useful comments and suggestions.

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