Alternative price-setting regimes in open-economy models that incorporate nominal price rigidities and monopolistic competition have distinct implications for the mechanism transmitting shocks across countries. Recent research in this field has proceeded under one of two assumptions: producer-currency pricing or consumer-currency pricing. By determining the short-run effect of exchange rate changes on the relative price of imported to domestic goods, the currency of price setting effectively establishes the role of exchange rates in shifting consumer allocation decisions across countries. It follows that the international monetary transmission mechanism differs markedly under the two assumptions, implying different properties for many substantial issues in international economics.
Amanda L. Kramer
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