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Does Export Pricing Explain ‘Fear of Floating’ in Small Open Emerging Market Economies?

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  • M Farid
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    Abstract

    Trade data on East Asian EMEs shows the predominant use of Dollar Currency Pricing (DCP). Using a DSGE model with six-stage vertical production chain, staggered prices, and cross-border trade in intermediate inputs, we aim to provide an alternative explanation for ‘fear of floating’ by EMEs. We examine interactions between firms’ pricing rules and the transmission of external shocks under different exchange rate regimes. We find that weak input substitution and DCP of exports eliminate expenditure-switching and the allocative role of exchange rate adjustment, resulting in ‘exchange rate disconnect’, and hence ‘fear of floating’ by EMEs.

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    Paper provided by Department of Economics, University of York in its series Discussion Papers with number 10/05.

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    Date of creation: Mar 2010
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    Handle: RePEc:yor:yorken:10/05

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    Keywords: Vertical production chain; Staggered price contracts; Input Substitution; External Currency Pricing; Monetary Policy;

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