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10. April 2019


Reforms and the Real Exchange Rate: The Role of Pricing-to-Market


10. April 2019


Joan Robinson Room
DIW Berlin
Room 3.3.002a
Mohrenstraße 58
10117 Berlin


Celine Poilly, University of Aix-Marseille, France

The paper investigates how endogenous markups affect the extent to which policy reforms can inuence international competitiveness. In a two-country model where trade costs allow for international market segmentation, we show that endogenous pricing-to-market behavior of firms acts as an important transmission channel of the policies. By strengthening the degree of competition between rms, product market deregulation at home leads to a reduction in domestic markups, which generally leads to an improvement in the international competitiveness of the Home country. Conversely, the power of competitive tax policy to depreciate the real exchange rate is dampened, as domestic firms take the opportunity of the labor tax cut to increase their markups. The variability of markups also affects the normative implications of the reforms. This indicates the importance of taking into account endogenous pricing-to-market behavior when intending to correctly evaluate the overall effects of the reforms.

Celine Poilly, University of Aix-Marseille, France