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Foreign Currency Pricing

  • Irina Levina



  • Oleg Zamulin


    (New Economic School and CEFIR)

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.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0023.

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Length: 30 pages
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:cfr:cefirw:w0023
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  1. Pablo Guidotti & Carlos A. Rodríguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," CEMA Working Papers: Serie Documentos de Trabajo. 81, Universidad del CEMA.
  2. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  3. Rudiger Dornbusch & Alejandro Reynoso, 1989. "Financial Factors in Economic Development," NBER Working Papers 2889, National Bureau of Economic Research, Inc.
  4. Lane, Philip R., 1999. "The New Open Economy Macroeconomics: a Survey," CEPR Discussion Papers 2115, C.E.P.R. Discussion Papers.
  5. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
  6. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
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