Adjustment costs and pricing-to-market theory and evidence

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Abstract

This paper develops an adjustment cost model of pricing-to-market. The model consists of a monopolist who supplies an identical, nondurable good to two foreign markets. It is shown that the degree of pricing-to-market increases with the relative importance of the transitory component in exchange rates. Customs data from 1978 through 1987 on U.S. and Canadian imports of seven German commodities are used to estimate the model's parameters and test its over-identifying restrictions.

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    This paper is based on chapter 2 of my dissertation, done in the Department of Economics at the University of Chicago. I would like to thank the members of my thesis committee, John Cochrane, Lars Hansen and John Huizinga for many helpful comments. I also received useful suggestions from Eric Fisher, Richard Highfield, David Papell, and two anonymous referees. Remaining errors and ambiguities are my responsibility.

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