Foreign Currency Pricing
A special case of dollarization is analyzed: quotation of prices in dollars. The proposed explanation is price stickiness: when price adjustment is costly, firms prefer to fix their prices in a stable foreign currency in order to avoid frequent price changes. The proposed model demonstrates that there are often two Nash equilibria in an economy populated by symmetric firms: an equilibrium with uniform domestic currency pricing and one with uniform dollar pricing. Hence, foreign currency pricing may exhibit hysteresis. The model also demonstrates that the degree of competition in the economy is important in determining the pricing currency.
Volume (Year): 38 (2006)
Issue (Month): 3 (April)
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