Abstract
This paper builds a baseline two-country model of real and monetary transmission in the presence of optimal international price discrimination by firms. Distributing traded goods to consumers requires nontradables, making the price elasticity of demand country-specific and a function of the exchange rate. Profit-maximizing monopolistic firms drive a wedge between prices across countries, optimally dampening the response of import and consumer prices to exchange-rate movements. We derive general equilibrium expressions for the pass-through into import and consumer prices, tracing the differential impact of real and monetary shocks on marginal cost and markup fluctuations through the exchange rate.
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