This paper presents a new model of Bertrand competition between heterogeneous firms in the open economy where the macroeconomic distribution of markups responds to the degree of trade openness and the underlying level of technology in each trading partner. The model’s simple closed-form distributions for markups and pricing yield predictions that coincide with a number of stylized facts from the empirical literature on markups, pass-through, and trade openness which previously could be illustrated only through numerical simulations. (JEL D43, F12, F41, L13)
In this paper we study jointly optimal fiscal and monetary policies in a small open economy framework with capital and sticky prices. We consider the case of distortionary taxes on labor and capital, and no public debt. As in a closed economy setup , in the steady state, the optimal inflation rate is zero, as well as the optimal tax on capital. The dynamic properties of optimal monetary and fiscal policies in an open economy are qualitatively the same as those of a closed economy: the tax rate on capital income remains constant over the cycle, while both the nominal interest rate and the tax rate on labor income move although very smoothly, respectively to minimize the distortions implied by nominal rigidities and balance the budget.
for detailed comments in early stages of the project. Beatriz de Blas acknowledges financial support from the ECO2008-04073 project of the Spanish MEC, and the CCG08-UAM/HUM-4438. This paper circulated in an earlier form under the title "Teams of Rivals: Endogenous Markups in a Ricardian World." The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
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