Effects of the Exchange-Rate Regime on Trade under Monetary Uncertainty: The Role of Price Setting

In a baseline stochastic new open-economy macroeconomics (NOEM)model which parallels alternative invoicing conventions, namely consumer’s currency pricing (CCP) vs. producer’s currency pricing (PCP), we revisit the question whether the exchange-rate regime matters for trade. We show analytically that under full symmetry, only money shocks and separable but otherwise very general utility, it is irrelevant in affecting expected trade-to-output ratios. A peg-float comparison is nevertheless meaningful under PCP, although not CCP, in terms of volatility of national trade shares: by shutting down the pass-through and expenditure-switching channel, a peg then stabilizes equilibrium trade-to-GDP at its expected level.