Expenditure-Switching Effect and the Choice of Exchange Rate Regime
AbstractThe author investigates the quantitative importance of the expenditure-switching effect by developing and estimating a structural sticky-price model nesting both producer currency pricing (PCP) and local currency pricing (LCP) settings. The author aims to provide empirical evidence of the magnitude of the benefits to be gained from exchange rate flexibility in terms of expenditure switching, and to contribute to the ongoing debate regarding the optimal exchange rate regime. In the author's model, the size of the expenditure-switching effect is determined by the degree of price stickiness, the fraction of firms employing PCP versus LCP, the distribution margin, and the elasticity of substitution between domestic and foreign tradable goods. The model is estimated for three small open economies: Australia, Canada, and the United Kingdom. The empirical results suggest that, among the three countries, the magnitude of the expenditure switching by domestic agents is relatively small for the United Kingdom, and comparatively large for Canada; the distribution margin in the United Kingdom is exceptionally high, which limits the degree of domestic expenditure switching initiated by nominal exchange rate movements. Moreover, expenditure switching by foreign distributors is comparatively small for Australia and Canada, since a larger fraction of Australian and Canadian firms adopt LCP for their export price-setting.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 07-54.
Length: 54 pages
Date of creation: 2007
Date of revision:
Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Exchange rate regimes; International topics;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-17 (All new papers)
- NEP-CBA-2007-11-17 (Central Banking)
- NEP-IFN-2007-11-17 (International Finance)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Barnett, William A. & Eryilmaz, Unal, 2013.
"Hopf bifurcation in the Clarida, Gali, and Gertler model,"
Elsevier, vol. 31(C), pages 401-404.
- William Barnett & Unal Eryilmaz, 2012. "Hopf Bifurcation in the Clarida, Gali, and Gertler Model," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201211, University of Kansas, Department of Economics, revised Sep 2012.
- Barnett, William A. & Eryilmaz, Unal, 2012. "Hopf bifurcation in the Clarida, Gali, and Gertler model," MPRA Paper 40668, University Library of Munich, Germany.
- Wang, Jian, 2010.
"Home bias, exchange rate disconnect, and optimal exchange rate policy,"
Journal of International Money and Finance,
Elsevier, vol. 29(1), pages 55-78, February.
- Jian Wang, 2007. "Home bias, exchange rate disconnect, and optimal exchange rate policy," Working Papers 0701, Federal Reserve Bank of Dallas.
- Carlos Garcia & Jorge Restrepo & Scott Roger, 2009.
"Hybrid Inflation Targeting Regimes,"
IMF Working Papers
09/234, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.