《PRICING-TO-MARKET IN A RICARDIAN MODEL OF INTERNATIONAL TRADE》.pdf

NBER WORKING PAPER SERIES PRICING-TO-MARKET IN A RICARDIAN MODEL OF INTERNATIONAL TRADE Andrew Atkeson Ariel Burstein Working Paper 12861 /papers/w12861 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 January 2007 The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2007 by Andrew Atkeson and Ariel Burstein. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Pricing-to-Market in a Ricardian Model of International Trade Andrew Atkeson and Ariel Burstein NBER Working Paper No. 12861 January 2007 JEL No. E31,F1,F12,F41 ABSTRACT We study the implications for international relative prices of a simple Ricardian model of international trade with imperfect competition and variable markups, providing a tractable account of firm-level and aggregate prices. We show that both trade costs and imperfect competition with variable markups are needed to account for pricing-to-market at the firm and aggregate levels. We also show that international trade costs are essential, but pricing-to-market is not, to account for a high volatility of tradeable consumer prices relative to the overall CPI-based real-exchange rate. Andrew Atkeson Bunche Hall 9381 Department of Economics UCLA Box 951477 Los Angeles, CA 90095-1477 and NBER andy@ Ariel Burstein UC, Los Angeles Department of Economics Bunche Hall 8365 Box 951477