Advanced Search
MyIDEAS: Login to save this paper or follow this series

A Theory of the Currency Denomination of International Trade

Contents:

Author Info

  • Philippe Bacchetta
  • Eric van Wincoop

Abstract

Nominal rigidities due to menu costs have become a standard element in closed economy macroeconomic modeling. The 'New Open Economy Macroeconomics' literature has investigated the implications of nominal rigidities in an open economy context and found that the currency in which prices are set has significant implications for exchange rate pass-through to import prices, the level of trade and net capital flows, and optimal monetary and exchange rate policy. While the literature has exogenously assumed in which currencies goods are priced, in this paper we solve for the equilibrium optimal pricing strategies of firms. We find that the higher the market share of an exporting country in an industry, and the more differentiated its goods, the more likely its exporters will price in the exporter's currency. Country size and the cyclicality of real wages play a role as well, but are empirically less important. We also show that when a set of countries forms a monetary union, the new currency is likely to be used more extensively in trade than the sum of the currencies it replaces.

Download Info

If 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.
File URL: http://www.nber.org/papers/w9039.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9039.

as in new window
Length:
Date of creation: Jul 2002
Date of revision:
Publication status: published as Bacchetta, Philippe and Eric van Wincoop. "A Theory Of The Currency Denomination Of International Trade," Journal of International Economics, 2005, 67(2,Dec), 295-319
Handle: RePEc:nbr:nberwo:9039

Note: IFM ITI
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Maurice Obstfeld, 2002. "Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics," NBER Working Papers 9118, National Bureau of Economic Research, Inc.
  2. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, Elsevier, vol. 54(2), pages 235-266, August.
  3. Charles Engel & John H. Rogers, 1999. "Deviations from Purchasing Power Parity:Causes and Welfare Costs," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 0038, Department of Economics at the University of Washington.
  4. Jiawen Yang, 1992. "Exchange Rate Pass-Through in U.S. Manufacturing Industries," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 92-28, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Philippe Bacchetta & Eric van Wincoop, 1998. "Does Exchange Rate Stability Increase Trade and Capital Flows?," Working Papers 98.04, Swiss National Bank, Study Center Gerzensee.
  6. Cedric Tille, 2002. "On the distributional effects of exchange rate fluctuations," Staff Reports, Federal Reserve Bank of New York 146, Federal Reserve Bank of New York.
  7. Peter Hooper & Karen Johnson & Jaime Marquez, 1998. "Trade elasticities for G-7 countries," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 609, Board of Governors of the Federal Reserve System (U.S.).
  8. Philippe Bacchetta & Eric van Wincoop, 2001. "A Theory of the Currency Denomination of International Trade," Working Papers 01.07, Swiss National Bank, Study Center Gerzensee.
  9. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
  10. Devereux, Michael B. & Engel, Charles & Storgaard, Peter E., 2004. "Endogenous exchange rate pass-through when nominal prices are set in advance," Journal of International Economics, Elsevier, Elsevier, vol. 63(2), pages 263-291, July.
  11. Paul Klemperer & Margaret Meyer, 1986. "Price Competition vs. Quantity Competition: The Role of Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 618-638, Winter.
  12. Bekx, P. & Directorate General II - Economic and Financial Affairs, 1998. "The Implications of the Introduction of the Euro for Non-EU Countries," Papers, Commission of the EEC - Euro Papers 26, Commission of the EEC - Euro Papers.
  13. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  14. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, Elsevier, vol. 24(1-2), pages 45-68, February.
  15. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
  16. Feinberg, Robert M, 1986. "The Interaction of Foreign Exchange and Market Power Effects on German Domestic Prices," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 35(1), pages 61-70, September.
  17. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-validating optimum currency areas," Staff Reports, Federal Reserve Bank of New York 152, Federal Reserve Bank of New York.
  18. Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(2), pages 281-305, March.
  19. Sutherland, Alan, 2005. "Incomplete pass-through and the welfare effects of exchange rate variability," Journal of International Economics, Elsevier, Elsevier, vol. 65(2), pages 375-399, March.
  20. Donnenfeld, S. & Zilcha, I., 1989. "Pricing Of Exports And Exchange Rate Uncertainty," Papers, Tel Aviv 12-89, Tel Aviv.
  21. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  22. Philippe BACCHETTA & Eric VAN WINCOOP, 1999. "Does Exchange Rate Stability Increase Trade and Welfare ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9917, Université de Lausanne, Faculté des HEC, DEEP.
  23. Campa, José Manuel & Goldberg, Linda S, 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4391, C.E.P.R. Discussion Papers.
  24. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
  25. Robert C. Feenstra & Joseph E. Gagnon & Michael M. Knetter., 1993. "Market share and exchange rate pass-through in world automobile trade," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 446, Board of Governors of the Federal Reserve System (U.S.).
  26. Jean-Marie Viaene & Casper Vries, 1992. "On the design of invoicing practices in international trade," Open Economies Review, Springer, Springer, vol. 3(2), pages 133-142, June.
  27. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  28. Philippe Bacchetta & Eric van Wincoop, 2003. "Why Do Consumer Prices React Less Than Import Prices to Exchange Rates?," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(2-3), pages 662-670, 04/05.
  29. Charles Engel, 2002. "Expenditure Switching and Exchange Rate Policy," NBER Working Papers 9016, National Bureau of Economic Research, Inc.
  30. Rey, Hélène, 1999. "International Trade and Currency Exchange," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2226, C.E.P.R. Discussion Papers.
  31. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1007-1021, April.
  32. Maurice Obstfeld, 2003. "International Macroeconomics: Beyond the Mundell-Fleming Model," International Finance, EconWPA 0303006, EconWPA.
  33. Michael B. Devereux & Charles Engel, 2001. "Endogenous Currency of Price Setting in a Dynamic Open Economy Model," NBER Working Papers 8559, National Bureau of Economic Research, Inc.
  34. Philippe Bacchetta & Eric van Wincoop, 2000. "Trade Flows, Prices, and The Exchange Rate Regime," Working Papers 00.11, Swiss National Bank, Study Center Gerzensee.
  35. Hartmann, Philipp, 1998. "The Currency Denomination of World Trade after European Monetary Union," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 424-454, December.
  36. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, Elsevier, vol. 45(1), pages 59-76, June.
  37. Charles Engel, 2002. "The Responsiveness of Consumer Prices to Exchange Rates And the Implications for Exchange-Rate Policy: A Survey Of a Few Recent New Open-Economy..," NBER Working Papers 8725, National Bureau of Economic Research, Inc.
  38. Giorgio Basevi & Daniela Cocchi & Pier Luigi Lischi, 1985. "The Choice of Currency in the Foreign Trade of Italy," Working Papers 17, Dipartimento Scienze Economiche, Universita' di Bologna.
  39. van Wincoop, Eric, 1999. "How big are potential welfare gains from international risksharing?," Journal of International Economics, Elsevier, Elsevier, vol. 47(1), pages 109-135, February.
  40. Bacchetta, Philippe & van Wincoop, Eric, 2002. "A Theory of Currency Denomination of International Trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3120, C.E.P.R. Discussion Papers.
  41. Baron, David P, 1976. "Fluctuating Exchange Rates and the Pricing of Exports," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 14(3), pages 425-38, September.
  42. Johnson, Martin & Pick, Daniel, 1997. "Currency Quandary: The Choice of Invoicing Currency under Exchange-Rate Uncertainty," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 5(1), pages 118-28, February.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9039. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.