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Please use this identifier to cite or link to this item: https://hdl.handle.net/2445/98893
Product Quality and International Price Dynamics
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Two puzzling facts of international real business cycles are 1) weak or negative correlations between the terms of trade and output, and 2) a rise in relative consumption for countries where national goods become relatively more expensive. We show these puzzles either vanish or become much weaker in recent data. We propose a new mechanism that generates endogenous international price movements that are consistent with both the "old" and the "new" facts. In this mechanism, firms operating in a monopolistically competitive environment adjust price and quality of their products in response to technological shocks. This model is consistent with the old facts if price levels are not adjusted for quality. Instead, if quality adjustments to price level are introduced, the model's properties are in line with the new facts.
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ARESPA CASTELLÓ, Marta and GRUBER, Diego. Product Quality and International Price Dynamics. UB Economics – Working Papers. 2016. Vol. E16/340. ISSN 1136-8365. [consulted: 9 of October of 2026]. Available at: https://hdl.handle.net/2445/98893