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Foreign Currency Pricing

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  • Levina, Irina
  • Zamulin, Oleg

Abstract

A special case of dollarization is analyzed: quotation of prices in dollars. The proposed explanation is price stickiness: when price adjustment is costly, firms prefer to fix their prices in a stable foreign currency in order to avoid frequent price changes. The proposed model demonstrates that there are often two Nash equilibria in an economy populated by symmetric firms: an equilibrium with uniform domestic currency pricing and one with uniform dollar pricing. Hence, foreign currency pricing may exhibit hysteresis. The model also demonstrates that the degree of competition in the economy is important in determining the pricing currency.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0044
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 3 (April)
Pages: 679-696

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:3:p:679-696

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References

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  1. Pablo E. Guidotti & Carlos A. Rodriguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 518-544, September.
  2. Rudiger Dornbusch & Alejandro Reynoso, 1989. "Financial Factors in Economic Development," NBER Working Papers 2889, National Bureau of Economic Research, Inc.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  4. Miles S. Kimball, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," NBER Working Papers 5046, National Bureau of Economic Research, Inc.
  5. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
  6. Lane, Philip R., 1999. "The New Open Economy Macroeconomics: a Survey," CEPR Discussion Papers 2115, C.E.P.R. Discussion Papers.
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Cited by:
  1. Shilov, Andrey & Möller, Joachim, 2009. "The wage curve in Russia, 1995-2005," Economics Letters, Elsevier, vol. 102(2), pages 90-92, February.
  2. Konstantin Styrin & Oleg Zamulin, 2003. "Estimating Price Rigidities in the Russian Real Estate Markets," Working Papers w0026, Center for Economic and Financial Research (CEFIR).
  3. Kamps, Annette, 2006. "The euro as invoicing currency in international trade," Working Paper Series 0665, European Central Bank.

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