Essays in international economics

A central issue in international macroeconomics is the volatile and persistent nature of international relative prices. The predominant theoretical framework to explain their behavior is based on nominal rigidities. While these types of models have been successful in replicating important aggregate business cycle facts, they are inconsistent with micro-evidence on how firms adjust their prices following changes in the nominal exchange rate. My dissertation develops models based on consumer search frictions consistent with evidence on international relative prices and firm pricing. In the first chapter, International Deviations From The Law of One Price: Preserving Market Share Under The Threat Of Search, a two-country Markov model of an industry in which consumers search to change suppliers is developed to examine international deviations from the law of one price and the variability of markups across countries over time. The cost and uncertainty of forming new relationships gives firms monopoly power over their current consumers that depends on the proportion of foreign firms selling in the consumer\u27s country and the relative production costs of domestic and foreign firms. An asymmetric distribution of firms across countries allows firms to charge different prices in their home and export markets. Volatile and persistent changes to the relative cost of production across countries lead to large and persistent deviations from the law of one price. The model generates a non-linear relation between market share and pass-through similar to the relationship documented in the auto industry by Feenstra, Gagnon and Knetter (1996). Once-and-for-all entry is consistent with multiple asymmetric distributions of firms across countries. The second chapter, International Relative Price Volatility and Intranational Price Dispersion, develops a model consistent with evidence on price dispersion within a country to examine international relative prices at the disaggregate and aggregate level. Consumers must search in order to purchase a consumption good. Search is noisy and there is an opportunity cost of search in terms of foregone work. As the opportunity cost of search differs across countries, firms to set prices differently depending on the market they are serving. Small productivity shocks generate large movements in aggregate and disaggregate international relative prices