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Pricing in Multiple Currencies in Domestic Markets

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  • Andres Drenik

    (Columbia University)

Abstract

We document that in emerging economies a significant fraction of prices in do- mestic markets are set in dollars. The currency of prices is not homogeneous across goods. More expensive goods are more likely to be set in dollars and also take longer time to sell. We rationalize these facts using a model of price setting in multiple currencies with search frictions. Pricing in dollars prevents erosion of real prices caused by inflation at the expense of a lower willingness to pay from buyers. When goods take longer to sell the relative value of preventing price erosion is higher. Consistent with empirical evidence, our model predicts that the share of prices in foreign currency increases when domestic inflation is high.

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  • Andres Drenik, 2017. "Pricing in Multiple Currencies in Domestic Markets," 2017 Meeting Papers 1418, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1418
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    References listed on IDEAS

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    1. Kenneth Burdett & Guido Menzio, 2018. "The (Q,S,s) Pricing Rule," Review of Economic Studies, Oxford University Press, vol. 85(2), pages 892-928.
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    4. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
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    6. Calvo, Guillermo A. & Izquierdo, Alejandro & Loo-Kung, Rudy, 2006. "Relative price volatility under Sudden Stops: The relevance of balance sheet effects," Journal of International Economics, Elsevier, vol. 69(1), pages 231-254, June.
    7. Greg Kaplan & Guido Menzio, 2016. "Shopping Externalities and Self-Fulfilling Unemployment Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 124(3), pages 771-825.
    8. Nicholas Trachter & Leena Rudanko & Guido Menzio & Greg Kaplan, 2015. "Relative Price Dispersion," 2015 Meeting Papers 417, Society for Economic Dynamics.
    9. Allen Head & Lucy Qian Liu & Guido Menzio & Randall Wright, 2012. "Sticky Prices: A New Monetarist Approach," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 939-973, October.
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    Cited by:

    1. Gerardo Licandro & Miguel Mello, 2017. "Foreign Currency Invoicing of Domestic Transactions as a Hedging Strategy Theory and Evidence for Uruguay," Documentos de trabajo 2017004, Banco Central del Uruguay.
    2. Pablo Picardo, 2019. "Predicción de precios de vivienda: Aprendizaje estadístico con datos de oferta y transacciones para la ciudad de Montevideo," Documentos de trabajo 2019002, Banco Central del Uruguay.

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