Micro Evidence For Pricing-To-Market • Decomposing movements in real export price of commodity i EP i EP i DP i p i ≡ ≡ x CPI i DP i CPI i � �� � � �� � PTM Res • Decomposing volatility: var ( p i x ) / var ( x ) ≈ 88% var ( EP i DP i ) PTM = ≈ 93% var ( EP i DP i ) + var ( DP i CP I ) var ( DP i CP I ) Res = ≈ 7% var ( EP i DP i ) + var ( DP i CP I ) Drozd, Nosal Understanding International Prices:Customers as Capital
Micro Evidence For Pricing-To-Market • Decomposing movements in real export price of commodity i EP i EP i DP i p i ≡ ≡ x CPI i DP i CPI i � �� � � �� � PTM Res • Decomposing volatility: var ( p i x ) / var ( x ) ≈ 88% var ( EP i DP i ) PTM = ≈ 93% var ( EP i DP i ) + var ( DP i CP I ) var ( DP i CP I ) Res = ≈ 7% var ( EP i DP i ) + var ( DP i CP I ) • Volatility attributable to pricing-to-market (PTM) Drozd, Nosal Understanding International Prices:Customers as Capital
Micro Evidence For Pricing-To-Market • Decomposing movements in real export price of commodity i EP i EP i DP i p i ≡ ≡ x CPI i DP i CPI i � �� � � �� � PTM Res • Decomposing correlation with x : corr ( p i x , x ) = − 0 . 82 PTM = corr ( EP i DP i , x ) = − 0 . 84 Res = corr ( DP i CPI , x ) = − 0 . 15 Drozd, Nosal Understanding International Prices:Customers as Capital
Micro Evidence For Pricing-To-Market • Decomposing movements in real export price of commodity i EP i EP i DP i p i ≡ ≡ x CPI i DP i CPI i � �� � � �� � PTM Res • Decomposing correlation with x : corr ( p i x , x ) = − 0 . 82 PTM = corr ( EP i DP i , x ) = − 0 . 84 Res = corr ( DP i CPI , x ) = − 0 . 15 • Correlation attributable to pricing-to-market (PTM) Drozd, Nosal Understanding International Prices:Customers as Capital
Data - Summary • Aggregate data ◦ real export and import prices positively correlated ◦ real export price positively correlated with the real exchange rates • Disaggregated data suggests ◦ export price movements can be attributed to pricing-to-market for more evidence see the survey by Goldberg and Knetter (1997) Drozd, Nosal Understanding International Prices:Customers as Capital
This Paper • Building market shares is costly and time consuming as argued by Dornbusch (1987) and Krugman (1986) • Leads to variable markups and pricing-to-market Drozd, Nosal Understanding International Prices:Customers as Capital
This Paper • Building market shares is costly and time consuming as argued by Dornbusch (1987) and Krugman (1986) • Leads to variable markups and pricing-to-market • Contribution ◦ formalize this idea into a micro-founded GE model - model marketing frictions in search and matching environment - make relations with customers valuable Drozd, Nosal Understanding International Prices:Customers as Capital
This Paper • Building market shares is costly and time consuming as argued by Dornbusch (1987) and Krugman (1986) • Leads to variable markups and pricing-to-market Drozd, Nosal Understanding International Prices:Customers as Capital
This Paper • Building market shares is costly and time consuming as argued by Dornbusch (1987) and Krugman (1986) • Leads to variable markups and pricing-to-market • Formalize this idea in a micro-founded model ◦ model marketing frictions in a search and matching environment ◦ make relationships with customers valuable Drozd, Nosal Understanding International Prices:Customers as Capital
This Paper • Building market shares is costly and time consuming as argued by Dornbusch (1987) and Krugman (1986) • Leads to variable markups and pricing-to-market • Formalize this idea in a micro-founded model ◦ model marketing frictions in a search and matching environment ◦ make relationships with customers valuable • Key quantitative discipline ◦ different S-R and L-R price elasticity of trade flows Drozd, Nosal Understanding International Prices:Customers as Capital
This Paper • Building market shares is costly and time consuming as argued by Dornbusch (1987) and Krugman (1986) • Leads to variable markups and pricing-to-market • Formalize this idea in a micro-founded model ◦ model marketing frictions in a search and matching environment ◦ make relationships with customers valuable • Key quantitative discipline ◦ different S-R and L-R price elasticity of trade flows • Show promising in accounting for price data Drozd, Nosal Understanding International Prices:Customers as Capital
Related Literature • Direct Evidence ◦ Hakansson (1982), Egan & Mody (1993) Turnbull & Cunnigham (1981), Ruhl & Willis (2008) Drozd, Nosal Understanding International Prices:Customers as Capital
Related Literature • Direct Evidence ◦ Hakansson (1982), Egan & Mody (1993) Turnbull & Cunnigham (1981), Ruhl & Willis (2008) • Models of Pricing-to-Market (Dornbusch 1987, Krugman 1986) ◦ Sluggish market shares: Froot & Klemperer (1989), Alessandria (2004) ◦ Consumer Search: Alessandria (2005) ◦ Vertical Structure of Industry: Atkeson & Burstein (2008) ◦ Local Nontradable Component: Dedola & Corsetti (2002, 2004) Drozd, Nosal Understanding International Prices:Customers as Capital
Related Literature • Direct Evidence ◦ Hakansson (1982), Egan & Mody (1993) Turnbull & Cunnigham (1981), Ruhl & Willis (2008) • Models of Pricing-to-Market (Dornbusch 1987, Krugman 1986) ◦ Sluggish market shares: Froot & Klemperer (1989), Alessandria (2004) ◦ Consumer Search: Alessandria (2005) ◦ Vertical Structure of Industry: Atkeson & Burstein (2008) ◦ Local Nontradable Component: Dedola & Corsetti (2002, 2004) • Short-Run/Long-Run Elasticity Puzzle ◦ Sunk Cost of Entry: Ruhl (2008) ◦ Evidence: Eaton & Kortum (2002), Head & Ries (2001), Hummels (2001), Reinert & Roland-Holst (1992) • Incomplete Pass-Through Literature ◦ Goldberg & Campa (2005,06), Goldberg & Knetter (1997), Marston (1990) Drozd, Nosal Understanding International Prices:Customers as Capital
Model Drozd, Nosal Understanding International Prices:Customers as Capital
Basic Structure • Symmetric world with two-countries and country-specific goods ◦ d good produced in the domestic country ◦ f good produced in the foreign country Drozd, Nosal Understanding International Prices:Customers as Capital
Basic Structure • Symmetric world with two-countries and country-specific goods ◦ d good produced in the domestic country ◦ f good produced in the foreign country • Composite consumption and investment good ◦ domestic country: c + i = G ( d, f ) ◦ foreign country: c ∗ + i ∗ = G ( f ∗ , d ∗ ) Drozd, Nosal Understanding International Prices:Customers as Capital
Basic Structure • Symmetric world with two-countries and country-specific goods ◦ d good produced in the domestic country ◦ f good produced in the foreign country • Composite consumption and investment good ◦ domestic country: c + i = G ( d, f ) ◦ foreign country: c ∗ + i ∗ = G ( f ∗ , d ∗ ) • d and f the only tradable goods • Physical capital and labor immobile across countries Drozd, Nosal Understanding International Prices:Customers as Capital
Agents • Producers ◦ Produce goods d at home ( f abroad), match with retailers • Retailers ◦ Match with producers, intermediate in trade between producers and households • Households ◦ Buy goods from retailers, accumulate physical capital, supply labor and capital to producers, trade assets Drozd, Nosal Understanding International Prices:Customers as Capital
Flow of Goods Domestic Country Foreign Country Producers Producers f d ∗ f ∗ d Retailers Retailers d f f ∗ d ∗ Households Households c ∗ + i ∗ = G ( f ∗ , d ∗ ) c + i = G ( d, f ) Drozd, Nosal Understanding International Prices:Customers as Capital
Flow of Goods Domestic Country Foreign Country Producers Producers d ∗ d Retailers Retailers Households Households Drozd, Nosal Understanding International Prices:Customers as Capital
Flow of Goods Domestic Country Foreign Country Producers Producers f d Retailers Retailers Households Households Drozd, Nosal Understanding International Prices:Customers as Capital
Flow of Goods Domestic Country Foreign Country Producers Producers Retailers Retailers d f Households Households c + i = G ( d, f ) Drozd, Nosal Understanding International Prices:Customers as Capital
Two Levels of Trade Domestic Country Foreign Country Producers Producers Wholesale trade Wholesale trade • search and matching • search and matching Retailers Retailers Local retail trade Local retail trade • competitive market • competitive market Households Households Drozd, Nosal Understanding International Prices:Customers as Capital
Two Levels of Prices Domestic Country Foreign Country Producers Producers p f p ∗ d p ∗ p d f Retailers Retailers P d P f P ∗ P ∗ f d Households Households Drozd, Nosal Understanding International Prices:Customers as Capital
Producers (domestic country perspective) • Measure one of producers • Produce good d according to: zk α l 1 − α • Subject to country specific productivity shock log( z t ) = ψ log( z t − 1 ) + ε t log( z ∗ t ) = ψ log( z ∗ t − 1 ) + ε ∗ t Drozd, Nosal Understanding International Prices:Customers as Capital
Producers (domestic country perspective) • Measure one of producers • Produce good d according to: zk α l 1 − α • Subject to country specific productivity shock log( z t ) = ψ log( z t − 1 ) + ε t log( z ∗ t ) = ψ log( z ∗ t − 1 ) + ε ∗ t • By CRS, summarize production by marginal cost v (given w and r ) v = min k,l { wl + rk | zF ( k, l ) = 1 } Drozd, Nosal Understanding International Prices:Customers as Capital
Producers Face Marketing Friction • Each has a list of customers H d , H ∗ d and marketing capital m d , m ∗ d • Can only sell to customers from the list (a fixed amount per period) • Marketing capital brings new customers to the list Drozd, Nosal Understanding International Prices:Customers as Capital
Producers Face Marketing Friction • Each has a list of customers H d , H ∗ d and marketing capital m d , m ∗ d • Can only sell to customers from the list (a fixed amount per period) • Marketing capital brings new customers to the list h – searching retailers ( potential new customers) m d m f h – searching retailers who become new customers m d + ¯ ¯ Drozd, Nosal Understanding International Prices:Customers as Capital
Producers Face Marketing Friction • Each has a list of customers H d , H ∗ d and marketing capital m d , m ∗ d • Can only sell to customers from the list (a fixed amount per period) • Marketing capital brings new customers to the list h – searching retailers ( potential new customers) m d m f h – searching retailers who become new customers m d + ¯ ¯ Drozd, Nosal Understanding International Prices:Customers as Capital
Producers Face Marketing Friction • Each has a list of customers H d , H ∗ d and marketing capital m d , m ∗ d • Can only sell to customers from the list (a fixed amount per period) • Marketing capital brings new customers to the list h – searching retailers ( potential new customers) m d m f h – searching retailers who become new customers m d + ¯ ¯ • Customer list evolves according to the law m d H d = (1 − δ H ) H d, − 1 + h m d + ¯ ¯ m f Drozd, Nosal Understanding International Prices:Customers as Capital
Producers Face Marketing Friction • Each has a list of customers H d , H ∗ d and marketing capital m d , m ∗ d • Can only sell to customers from the list (a fixed amount per period) • Marketing capital brings new customers to the list h – searching retailers ( potential new customers) m d m f h – searching retailers who become new customers m d + ¯ ¯ • Customer list evolves according to the law m d H d = (1 − δ H ) H d, − 1 + h m d + ¯ ¯ m f • Marketing capital evolves according to the law a d − δ m ) 2 m d = (1 − δ m ) m d, − 1 + a d − φm d, − 1 ( m d, − 1 Drozd, Nosal Understanding International Prices:Customers as Capital
Summary of Producer Problem • Maximize expected present value of Π d − v ) d ∗ − va d − xv ∗ a ∗ Π = ( p d − v ) d + ( xp ∗ d subject to ◦ sales constraints d ≤ H d ◦ laws of motion m d H d = (1 − δ H ) H d, − 1 + h m d + ¯ ¯ m f a d − δ m ) 2 m d = (1 − δ m ) m d, − 1 + a d − φm d, − 1 ( m d, − 1 ◦ analogous constraints apply in the foreign market Drozd, Nosal Understanding International Prices:Customers as Capital
Search by Retailers (Other Producers) • Search to match with producers (at cost χv ) m d ¯ ◦ meet local producer with probability π = m d + ¯ ¯ m f m f ¯ ◦ meet foreign producer with probability 1 − π = m d + ¯ ¯ m f • The match gives opportunity to trade one unit of output per period • The match dissolves with per period probability δ H Drozd, Nosal Understanding International Prices:Customers as Capital
Search by Retailers (Other Producers) • Search to match with producers (at cost χv ) m d ¯ ◦ meet local producer with probability π = m d + ¯ ¯ m f m f ¯ ◦ meet foreign producer with probability 1 − π = m d + ¯ ¯ m f • The match gives opportunity to trade one unit of output per period • The match dissolves with per period probability δ H Drozd, Nosal Understanding International Prices:Customers as Capital
Endogenous Measure of Searching Retailers h • Measure of searching retailers h is endogenously determined by πV d + (1 − π ) V f ≤ χv with ‘ = ’ whenever h > 0 where: V d = max { 0 , P d − p d } + (1 − δ H ) E t [ QV ′ d ] V f = max { 0 , P f − p f } + (1 − δ H ) E t [ QV ′ f ] Drozd, Nosal Understanding International Prices:Customers as Capital
Determination of Wholesale Prices • Producer & retailer bargain for the wholesale price p d (or p f ) • At each history s t prices satisfy the Nash Bargaining problem p d ( s t ) ∈ argmax p { J d ( s t ; p ) θ V d ( s t ; p ) 1 − θ } where J d ( s t ; p ) = max { 0 , p − v ( s t ) } + (1 − δ H ) E t Q ( s t +1 | s t ) J d ( s t +1 ; p d ( s t +1 )) - value from the match for the producer V d ( s t ; p ) = max { 0 , P d ( s t ) − p } + (1 − δ H ) E t Q ( s t +1 | s t ) V d ( s t +1 ; p d ( s t +1 )) - value from the match for the retailer Drozd, Nosal Understanding International Prices:Customers as Capital
Determination of Wholesale Prices Proposition The solution results in instantaneous surplus splitting p d = θP d + (1 − θ ) v p f = θP f + (1 − θ ) xv ∗ • Intuition: ◦ from tomorrow on the trade surplus split in proportion θ, 1 − θ ◦ from today on the trade surplus split in proportion θ, 1 − θ ◦ Implication: today’s instantaneous surplus split the same way Drozd, Nosal Understanding International Prices:Customers as Capital
Households � ∞ t =0 β t u ( c, 1 − l ) • Maximize E t subject to ◦ Armington aggregation γ − 1 γ − 1 γ γ ) c + i = G ( d, f ) = ( ωd + (1 − ω ) f γ γ − 1 ◦ law of motion for physical capital k ( s t ) = (1 − δ ) k ( s t − 1 ) + i ◦ standard budget constraint under complete markets � Q ( s t +1 | s t ) b ( s t +1 | s t ) µ ( ds t +1 ) = b ( s t ) + wl + rk ( s t − 1 ) + Π P d d + P f f + S ◦ Numeraire normalization: price of final good is one Drozd, Nosal Understanding International Prices:Customers as Capital
Market Clearing and Feasibility • Meeting probability consistency condition m d ¯ π = m d + ¯ ¯ m f • Representativeness m d = ¯ m d , m f = ¯ m f • Production feasibility d + d ∗ + a d + a f + χh = zF ( k, l ) • Definition of equilibrium is standard Drozd, Nosal Understanding International Prices:Customers as Capital
Intuition and Qualitative Features Drozd, Nosal Understanding International Prices:Customers as Capital
Parameterization: Qualitative Features • Model parameters are such that ◦ domestic and foreign goods close substitutes ◦ market shares are sluggish in the short-run • Justified quantitatively by: ◦ estimates of low short-run and high long-run price elasticity of trade flows – trade responsive to trade liberalizations – trade unresponsive to price changes in time-series Drozd, Nosal Understanding International Prices:Customers as Capital
Primitive Shock 1 Percentage Deviation from SS 0.8 z 0.6 0.4 0.2 * z 0 1 11 21 31 Quarters After the Shock Positive productivity shock in the domestic country Drozd, Nosal Understanding International Prices:Customers as Capital
Key Feature: Producers Price To Market 0.3 Percentage Deviation from SS x p x 0.1 1 11 21 31 p d -0.1 Quarters After the Shock Markups on exported goods go up when real exchange rate depreciates! Drozd, Nosal Understanding International Prices:Customers as Capital
Comovement of Prices in the Models 0.8 Benchmark model Standard model p 0.3 0.6 m Percentage Deviation from SS x x 0.4 p m 0.1 0.2 p x 0 1 11 21 31 1 11 21 31 = p p x d -0.1 -0.2 Quarters After the Shock Quarters After the Shock corr ( p x , p m ) = +1 corr ( p x , p m ) = − 1 sd ( p ) /sd ( x ) = 0 . 26 sd ( p ) /sd ( x ) > 1 Drozd, Nosal Understanding International Prices:Customers as Capital
Why Do Producers Price To Market? 0.3 Percentage Deviation from SS x p x 0.1 1 11 21 31 p d -0.1 Quarters After the Shock p x = θxP ∗ d + (1 − θ ) v p d = θP d + (1 − θ ) v Drozd, Nosal Understanding International Prices:Customers as Capital
Why Do Producers Price To Market? 0.6 Wholesale prices Retail prices 0.3 Percentage Deviation from SS 0.4 x * xP d p 0.2 x 0.1 0 1 11 21 31 P 1 11 21 31 d p d -0.1 -0.2 Quarters After the Shock Quarters After the Shock xP ∗ d > P d p x = θxP ∗ d + (1 − θ ) v p d = θP d + (1 − θ ) v p x > p d – not arbitraged away due to marketing friction Drozd, Nosal Understanding International Prices:Customers as Capital
Why xP ∗ d rises relative to P d ? A. Retail prices ( P ∗ d , P d ) change slowly and little B. Real exchange rate x depreciates: xP ∗ d goes up relative to P d Drozd, Nosal Understanding International Prices:Customers as Capital
Why xP ∗ d rises relative to P d ? A. Retail Prices Change Slowly and Little • Retail prices depend on relative scarcity of foreign to domestic goods γ − 1 P d = ω [ ω + (1 − ω ) f γ 1 ] γ − 1 d • Relative scarcity sluggish due to sluggish market shares in the S-R m f ¯ (1 − δ H ) H f, − 1 + m f h d = H f f m d + ¯ ¯ = ¯ m d H d (1 − δ H ) H d, − 1 + m f h m d + ¯ ¯ • Domestic and foreign goods closely substitutable (high γ ) Drozd, Nosal Understanding International Prices:Customers as Capital
Why xP ∗ d rises relatively to P d ? B. Real Exchange Rate Depreciates • Real exchange rate = price of foreign consumption basket in terms of the domestic consumption consumption basket Drozd, Nosal Understanding International Prices:Customers as Capital
Why xP ∗ d rises relatively to P d ? B. Real Exchange Rate Depreciates • Real exchange rate = price of foreign consumption basket in terms of the domestic consumption consumption basket • Following the shock, delivering consumption at home costs less than delivering consumption abroad Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Market share of good d Market share of good f Domestic Country Foreign Country Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Foreign Households Domestic Households Retailers Retailers h h * Market share of good d Market share of good f Domestic Country Foreign Country Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Foreign Households Domestic Households Retailers Retailers h h * Productivity shock = additional supply of cheaper d- goods Market share of good d Market share of good f Domestic Country Foreign Country Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Foreign Households Domestic Households Retailers Retailers h h * How is the additional supply channeled to households? Market share of good d Market share of good f Domestic Country Foreign Country Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Foreign Households Domestic Households Retailers Retailers h h * Market share adjustment (convex marginal cost) Market share of good d Market share of good f Domestic Country Foreign Country Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Foreign Households Domestic Households Retailers Retailers h ↑ h * ↑ More intensive search by retailers (flat marginal cost) Market share of good d Market share of good f Domestic Country Foreign Country Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Foreign Households Domestic Households Retailers Retailers h h * Asymmetric market shares = search more efficient at home Market share of good d Market share of good f Domestic Country Foreign Country Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Foreign Households Domestic Households Retailers Retailers h h * Real exchange rate depreciates ! Market share of good d Market share of good f Domestic Country Foreign Country Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Foreign Households Domestic Households Retailers Retailers h ↑ ↑ h * ↑ Equilibrium response of search asymmetric … Market share of good d Market share of good f Domestic Country Foreign Country c ↑ ↑ c * ↑ Drozd, Nosal Understanding International Prices:Customers as Capital
Real Exchange Rate Depreciates Foreign Households Domestic Households Retailers Retailers h ↑ ↑ h * ↑ Market share of good d Market share of good f Domestic Country Foreign Country Under complete markets “MRS” equalized with depreciating real exchange rate: * u ' ( c ) c ↑ ↑ ↑ c * ↑ x = u ' ( c ) Drozd, Nosal Understanding International Prices:Customers as Capital
Recap 0.6 Wholesale prices Retail prices 0.3 0.4 Percentage Deviation from SS x * xP d p 0.2 x 0.1 0 1 11 21 31 P * P 1 11 21 31 d p d d -0.2 -0.1 Quarters After the Shock Quarters After the Shock • Retail prices sluggish • Real exchange rate depreciates: xP ∗ d > P d • Bargaining leads to p x > p d • Marketing frictions make p x > p d sustainable in S-R Drozd, Nosal Understanding International Prices:Customers as Capital
Parameterization and Quantitative Results Drozd, Nosal Understanding International Prices:Customers as Capital
Key Quantitative Discipline • Account for the short run vs. long run price elasticity puzzle ◦ trade responsive to tariff reductions in the long run ◦ trade unresponsive to price fluctuations in time-series Drozd, Nosal Understanding International Prices:Customers as Capital
Key Quantitative Discipline • Account for the short run vs. long run price elasticity puzzle ◦ trade responsive to tariff reductions in the long run – price elasticity of trade high ≈ 8 ◦ trade unresponsive to price fluctuations in time-series – price elasticity of trade low ≈ 1 Drozd, Nosal Understanding International Prices:Customers as Capital
Key Quantitative Discipline • Account for the short run vs. long run price elasticity puzzle ◦ trade responsive to tariff reductions in the long run – price elasticity of trade high ≈ 8 ◦ trade unresponsive to price fluctuations in time-series – price elasticity of trade low ≈ 1 • Pins down two parameters: ◦ elasticity of substitution in preferences: γ γ − 1 γ − 1 γ γ ) G ( d, f ) = ( ωd + (1 − ω ) f γ γ − 1 – γ = 8 gives high ‘long-run elasticity’ ◦ market expansion friction: φ � � 2 a d m d = (1 − δ m ) m d, − 1 + a d − φ m d, − 1 − δ m m d, − 1 – φ gives low ‘short-run elasticity’ Drozd, Nosal Understanding International Prices:Customers as Capital
Details: Market Expansion Friction φ a d − δ m ) 2 m d = (1 − δ m ) m d, − 1 + a d − φm d, − 1 ( m d, − 1 • Set jointly with other parameters to match ◦ our measure of ‘short-run empirical elasticity of substitution’ volatility ratio: σ ( DA f ) /σ ( p f ) = 0 . 71 (12 OECD) P DA where: DA – domestic absorption in constant prices where: f – imports in constant prices where: p f – deflator price of imports where: P DA – deflator price of domestic absorption • Theoretical justification: in the frictionless model volatility ratio is ≈ γ Drozd, Nosal Understanding International Prices:Customers as Capital
Parameterization – Overview • Step 1: Select the following parameters independently γ = 7 . 9 , β = 0 . 99 , α = 0 . 36 , σ = 2 , δ = 0 . 025 , δ H = 0 . 1 (arbitrary) • Step 2: Select remaining parameters jointly φ = 18 . 4 , δ m = 0 . 2 , θ = 0 . 4 , χ = 1 . 38 , η = 0 . 34 , ω = 0 . 56 , shocks to hit the following targets from the data Data Target Value 1. Import to GDP 12% 2. Producer markups 10% 3. Volatility of p x relative to x 37% 4. Volatility ratio 0.71 5. Market activities in time endowment 30% 6. Share of marketing expenditures in GDP 7.0% 7. Moments of TFP process Drozd, Nosal Understanding International Prices:Customers as Capital
Quantitative Results Drozd, Nosal Understanding International Prices:Customers as Capital
Quantitative Results • State results and contrast with standard theory ◦ Benchmark ( γ = 7 . 9 , φ = 18 . 4 ) ◦ Standard model ( γ = 0 . 71 , no φ ) - worse statistics for international prices - similar statistics for quantities Drozd, Nosal Understanding International Prices:Customers as Capital
Quantitative Results: International Prices Model Economies Benchmark Standard Benchmark FA γ = 7 . 9 γ = 0 . 7 γ = 7 . 9 φ > 0 no φ φ > 0 Data Statistic A. Correlations p x , p m 0.75 0.98 -1.00 1.00 p x , x 0.46 0.99 -1.00 1.00 p, x 0.61 0.95 1.00 0.99 B. Volatility relative to x p x 0.37 0.37 0.17 0.37 p m 0.61 0.62 1.16 0.63 p 0.26 ∗ 0.26 1.31 0.26 3.60 0.43 0.50 1.65 std ( x ) Drozd, Nosal Understanding International Prices:Customers as Capital
Quantitative Results: International Prices Model Economies Benchmark Standard Benchmark FA γ = 7 . 9 γ = 0 . 7 γ = 7 . 9 φ > 0 no φ φ > 0 Data Statistic A. Correlations p x , p m 0.75 0.98 -1.00 1.00 p x , x 0.46 0.99 -1.00 1.00 p, x 0.61 0.95 1.00 0.99 B. Volatility relative to x p x 0.37 0.37 0.17 0.37 p m 0.61 0.62 1.16 0.63 p 0.26 ∗ 0.26 1.31 0.26 3.60 0.43 0.50 1.65 std ( x ) Drozd, Nosal Understanding International Prices:Customers as Capital
Quantitative Results: International Prices Model Economies Benchmark Standard Benchmark FA γ = 7 . 9 γ = 0 . 7 γ = 7 . 9 φ > 0 no φ φ > 0 Data Statistic A. Correlations p x , p m 0.75 0.98 -1.00 1.00 p x , x 0.46 0.99 -1.00 1.00 p, x 0.61 0.95 1.00 0.99 B. Volatility relative to x p x 0.37 0.37 0.17 0.37 p m 0.61 0.62 1.16 0.63 p 0.26 ∗ 0.26 1.31 0.26 C. Volatility of Real Exchange Rate 3.60 0.43 0.49 1.65 std ( x ) Drozd, Nosal Understanding International Prices:Customers as Capital
Quantitative Results: International Prices Model Economies Benchmark Standard Benchmark FA γ = 7 . 9 γ = 0 . 7 γ = 7 . 9 φ > 0 no φ φ > 0 Data Statistic A. Correlations p x , p m 0.75 0.98 -1.00 1.00 p x , x 0.46 0.99 -1.00 1.00 p, x 0.61 0.95 1.00 0.99 B. Volatility relative to x p x 0.37 0.37 0.17 0.37 p m 0.61 0.62 1.16 0.63 p 0.26 ∗ 0.26 1.31 0.26 C. Volatility of Real Exchange Rate 3.60 0.43 0.49 1.65 std ( x ) Drozd, Nosal Understanding International Prices:Customers as Capital
Quantitative Results: Quantities Model Economies Benchmark Standard Benchmark FA γ = 7 . 9 γ = 0 . 7 γ = 7 . 9 φ > 0 no φ φ > 0 Data Statistic A. International Comovement Output 0.40 0.35 0.36 0.37 Consumption 0.25 0.23 0.32 0.34 Investment 0.23 0.03 0.16 0.35 Employment 0.21 0.32 0.48 0.27 B. Volatility relative to GDP Consumption 0.74 0.32 0.31 0.32 Investment 2.79 3.67 3.36 3.67 Employment 0.81 0.69 0.48 0.69 Net Exports 0.29 ∗ 0.21 0.13 0.21 Drozd, Nosal Understanding International Prices:Customers as Capital
Comparison to Disaggregated Data • Consider our previous decomposition: EP i EP i DP i p i ≡ ≡ x CPI i DP i CPI i � �� � � �� � PTM Res • Volatility of p i x relative to x : ◦ Data : 93% from PTM ◦ Benchmark : 87% from PTM • Correlation with x : ◦ Data : PTM = 0 . 84 Res = − 0 . 15 ◦ Benchmark : PTM = 1 . 00 Res = − 1 . 00 Drozd, Nosal Understanding International Prices:Customers as Capital
Comparison to Disaggregated Data • Consider our previous decomposition: EP i EP i DP i p i ≡ ≡ x CPI i DP i CPI i � �� � � �� � PTM Res • Volatility of p i x relative to x : ◦ Data : 93% from PTM ◦ Benchmark : 87% from PTM ◦ Standard : 0% from PTM • Correlation with x : ◦ Data : PTM = 0 . 84 Res = − 0 . 15 ◦ Benchmark : PTM = 1 . 00 Res = − 1 . 00 ◦ Standard : PTM = 0 . 00 Res = − 1 . 00 Drozd, Nosal Understanding International Prices:Customers as Capital
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