The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by non-traded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to...

This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. [Dotsey, M., King, R.G., and Wolman, A.L., 1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655-690] and variable demand...

I provide new estimates of border frictions for 14 countries using local, national, and international Big Mac prices. I find that borders generally introduce only small price wedges, far smaller than those observed across New York City neighboring locations.

This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. (1999) in which firms discriminate across countries by setting prices in local currency. In this model, a domestic monetary expansion has greater spillover effects to foreign prices and foreign economic...