Survey_AL_2002

Abstract

We substantially extend the Dornbusch-Salop model. There are two distinct features of our model. First the model can to account for the asymmetry in the price adjustment. We are not aware of a theoretical model that explains asymmetric adjustments for PPP derivations. Secondly, the integrated approach allows us to discuss an array of conditions where the short and long run monetary neutrality within the international context is violated. In other words, the model presents in detail under which conditions imperfect competion is able to generaze persistent and volatile real exchange rate deviations. We also show that most of the predictions survive alternative market configurations. We concentrate our attention on entry and exit decisions in international trade. In our model, a bidding game precedes the actual entry stage. Potential entrants egage in a bidding game with each of the foreign incumbents for the corresponding brand location.