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On the Determinants of Exporters' Currency Pricing: History vs. Expectations

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  • Shin-ichi Fukuda

    (Faculty of Economics, University of Tokyo)

  • Masanori Ono

    (Faculty of Economics, Fukushima University)

Abstract

The purpose of this paper is to investigate why the choice of invoice currency under exchange rate uncertainty depends not only on expectations but also on history. The analysis is motivated by the fact that the U.S. dollar has historically been the dominant vehicle currency in developing countries. The theoretical analysis is based on an open economy model of monopolistic competition. When the market is competitive enough, the exporting firms tend to set their prices not to deviate from those of the competitors. As a result, a coordination failure can lead the third currency to be a less efficient equilibrium invoice currency. The role of expectations is important in selecting the equilibrium in the static framework. However, in the dynamic model with staggered price-setting, the role of history becomes another key determinant of the equilibrium currency pricing. The role of history may dominate the role of expectations when the firms are myopic, particularly in the competitive local market. It also becomes dominant in the staggered price setting when a small fraction of the new price setters are backward-looking. The result suggests the importance of history in explaining why the firm tends to choose the US dollar as vehicle currency.

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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-442.

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Length: 32pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:tky:fseres:2006cf442

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Citations

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Cited by:
  1. Anand Sinha, 2012. "Financial Sector Regulation and Implications for Growth," BIS Papers chapters, in: Bank for International Settlements (ed.), Financial sector regulation for growth, equity and stability, volume 62, pages 45-84 Bank for International Settlements.
  2. Straume, Hans-Martin, 2013. "Currency invoicing in Norwegian salmon export," Working Papers in Economics 11/13, University of Bergen, Department of Economics.
  3. Shinji Takagi, 2011. "Internationalising the yen, 1984-2003: unfinished agenda or mission impossible?," BIS Papers chapters, in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 75-92 Bank for International Settlements.
  4. Xiangyun Xu & Peng Guo, 2012. "Exchange rate appreciation expectation, importer's behavior and choice of invoicing currency: A theoretical model and Yen's empirical evidence," China Finance Review International, Emerald Group Publishing, Emerald Group Publishing, vol. 2(3), pages 231-245, June.
  5. Terada-Hagiwara, Akiko, 2011. "Asian holding of US Treasury securities: Trade integration as a threshold," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 321-335, September.

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