Abstract (may include machine translation)
We argue that the underlying width of the border in international price determination is a trivial fraction of the corresponding Engel and Rogers
(1996) reduced form estimate. We develop a two-country, multi-region, dynamic, stochastic equilibrium model of monopolistic competition with
costly price adjustment and cross-location shopping. The optimal price is proportional to a weighted average of market prices, with weights negatively related to shopping costs. We calibrate structural distance and border parameters to a unique panel of store-level prices, and conclude that price adjustment costs directly account for about a quarter of the reduced form border width.
(1996) reduced form estimate. We develop a two-country, multi-region, dynamic, stochastic equilibrium model of monopolistic competition with
costly price adjustment and cross-location shopping. The optimal price is proportional to a weighted average of market prices, with weights negatively related to shopping costs. We calibrate structural distance and border parameters to a unique panel of store-level prices, and conclude that price adjustment costs directly account for about a quarter of the reduced form border width.
Original language | English |
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Place of Publication | Zürich |
Publisher | Swiss National Bank |
State | Published - 2013 |