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Trade Flows, Prices, and The Exchange Rate Regime

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Abstract

This paper examines the relationship between the exchange rate regime and trade flows using a general equilibrium model based on Bacchetta and van Wincoop (AER, 2000). We show that in general the link between trade and the exchange rate regime is ambiguous and that it depends in particular on the nature of macroeconomic shocks and consumer preferences. A critical aspect is the pricing strategy adopted by monopolistically competitve firms. Trade is more likely to be affected by the exchange rate regime if firms price in buyers' currency, or price to market (PTM), than if they price in producers' currency (PCP). We show, however, that PCP is not an equilibrium under reasonable parameters when international capital markets are not available. In contrast, when markets become more complete, firms tend to switch to PCP.

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Bibliographic Info

Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 00.11.

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Length: 23 pages
Date of creation: Nov 2000
Date of revision:
Handle: RePEc:szg:worpap:0011

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Cited by:
  1. Alexander Mihailov, 2003. "When and How Much Does a Peg Increase Trade? The Role of Trade Costs and Import Demand Elasticity under Monetary Uncertainty," Economics Discussion Papers 567, University of Essex, Department of Economics.
  2. Philip R. Lane & Giovanni Ganelli, 2002. "Dynamic General Equilibrium Analysis: The Open Economy Dimension," Trinity Economics Papers 200212, Trinity College Dublin, Department of Economics.
  3. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," NBER Working Papers 9543, National Bureau of Economic Research, Inc.
  4. Philippe Bacchetta & Eric van Wincoop, 2001. "A Theory of the Currency Denomination of International Trade," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.13, Université de Lausanne, Faculté des HEC, DEEP.
  5. Bacchetta, Philippe & van Wincoop, Eric, 2002. "A Theory of Currency Denomination of International Trade," CEPR Discussion Papers 3120, C.E.P.R. Discussion Papers.

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