Endogenous Pricing to Market and Financing Costs / Joshua Aizenman.

By:

Aizenman, Joshua

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w7914.Publication details: Cambridge, Mass. National Bureau of Economic Research 2000.Description: 1 online resource: illustrations (black and white)Subject(s):

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: This paper studies the endogenous determination of pricing to market, in a model with time dependent transportation costs, where the future terms of trade are random. Allowing time dependent transportation costs adds a dimension of investment to the pre-buying of imports, implying that financial considerations determine the frequency of pricing to market, and the deviations from relative PPP. If the expected discounted cost of last minute delivery is higher than pre-buying, one exercises the option of spot market imports if the realized terms of trade are favorable enough. Pricing to market is observed in countries characterized by low terms of trade volatility and low financing costs. In these circumstances, imports are pre-bought, and the spot market for imports is inactive. In countries where the financing costs and the terms of trade volatility are high, few imports are pre-bought, the price of imports is determined by the realized real exchange rate, and a version of relative PPP holds. With an intermediate level of terms of trade volatility and of financing costs, a mixed regime is observed, and some imports are pre-bought. If the realized real exchange rate is favorable enough more imports are purchased in the spot market, the price of imports is determined by the realized real exchange rate, and the relative PPP holds. If the realized real exchange rate is weak, pricing to market would prevail, increasing consumers' welfare by shielding them from the adverse purchasing power consequences of weak terms of trade. Higher financing costs increase the cost of pre-buying imports, reducing thereby the frequency of pricing to market, increasing the expected relative price of imports, reducing the expected deviations from relative PPP, and reducing welfare.

Tags from this library: No tags from this library for this title. Log in to add tags.

Average rating: 0.0 (0 votes)

Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w7914 (Browse shelf(Opens below))	Not For Loan

Total holds: 0

Collection: Colección NBER Close shelf browser (Hides shelf browser)

Previous	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	Next
Previous	nber w7911 International Data on Educational Attainment Updates and Implications /	nber w7912 Estimating the Rental Adjustment Process /	nber w7913 A New Approach to Measuring Financial Contagion /	nber w7914 Endogenous Pricing to Market and Financing Costs /	nber w7915 Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models /	nber w7916 The Present and Future of Monetary Policy Rules /	nber w7917 Environmental Levies and Distortionary Taxation: Pigou, Taxation, and Pollution /	Next

September 2000.

This paper studies the endogenous determination of pricing to market, in a model with time dependent transportation costs, where the future terms of trade are random. Allowing time dependent transportation costs adds a dimension of investment to the pre-buying of imports, implying that financial considerations determine the frequency of pricing to market, and the deviations from relative PPP. If the expected discounted cost of last minute delivery is higher than pre-buying, one exercises the option of spot market imports if the realized terms of trade are favorable enough. Pricing to market is observed in countries characterized by low terms of trade volatility and low financing costs. In these circumstances, imports are pre-bought, and the spot market for imports is inactive. In countries where the financing costs and the terms of trade volatility are high, few imports are pre-bought, the price of imports is determined by the realized real exchange rate, and a version of relative PPP holds. With an intermediate level of terms of trade volatility and of financing costs, a mixed regime is observed, and some imports are pre-bought. If the realized real exchange rate is favorable enough more imports are purchased in the spot market, the price of imports is determined by the realized real exchange rate, and the relative PPP holds. If the realized real exchange rate is weak, pricing to market would prevail, increasing consumers' welfare by shielding them from the adverse purchasing power consequences of weak terms of trade. Higher financing costs increase the cost of pre-buying imports, reducing thereby the frequency of pricing to market, increasing the expected relative price of imports, reducing the expected deviations from relative PPP, and reducing welfare.