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CONSUMER SEARCH, PRICE DISPERSION, AND INTERNATIONAL RELATIVE PRICE FLUCTUATIONS *
Author(s) -
Alessandria George
Publication year - 2009
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2009.00549.x
Subject(s) - price dispersion , economics , law of one price , relative price , search cost , dispersion (optics) , econometrics , productivity , exchange rate , price level , mid price , monetary economics , microeconomics , macroeconomics , physics , optics
This article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price (LOP) and relative price fluctuations. Search frictions lead firms to price discriminate across markets based on the opportunity cost of search, which depends on the local wage. With productivity and taste shocks estimated from the data, deviations from the LOP are as volatile and persistent as in the data. Fluctuations in relative wages, real exchange rates, and the terms of trade are also consistent with the data.