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Foreign Currency Pricing

Author

Listed:
  • Irina Levina

    (CEFIR)

  • Oleg Zamulin

    (New Economic School and CEFIR)

Abstract

A special case of dollarization is analyzed: quotation of prices in dollars. The proposed explanation is price stickiness: when price adjustment is costly, forms can prefer to fix their prices in a stable foreign currency rather than in an unstable domestic one in order to avoid frequent price changes. The proposed model shows how the choice of price-setting currency made by a firm depends on the in ation rate, exchange rate volatility, the pricing currency of competitors and input suppliers, and the shape of the demand function. The model predicts that there are two Nash equilibria in the economy populated by symmetric firms: an equilibrium with uniform ruble pricing and an equilibrium with uniform dollar pricing. It is shown that in economy with less competition a smaller increase in inflation is needed to make an individual firm deviate from the equilibrium with uniform ruble pricing and turn to pricing in dollars.

Suggested Citation

  • Irina Levina & Oleg Zamulin, 2002. "Foreign Currency Pricing," Working Papers w0023, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:w0023
    as

    Download full text from publisher

    File URL: https://www.nes.ru/files/Preprints-resh/WP23.pdf
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    References listed on IDEAS

    as
    1. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
    2. Dornbusch, Rudiger & Reynoso, Alejandro, 1989. "Financial Factors in Economic Development," American Economic Review, American Economic Association, vol. 79(2), pages 204-209, May.
    3. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
    4. Rudiger Dornbusch & Ferico Sturzenegger & Holger Wolf, 1990. "Extreme Inflation: Dynamics and Stabilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 1-84.
    5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Pavel Kadochnikov, 2006. "An Analysis of Import Substitution in Russia after the 1998 Crisis," Research Paper Series, Gaidar Institute for Economic Policy, issue 95, pages 148-148.
    2. Konstantin Styrin & Oleg Zamulin, 2003. "Estimating Price Rigidities in the Russian Real Estate Markets," Working Papers w0026, Center for Economic and Financial Research (CEFIR).

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