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Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy

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  • Ozge Senay
  • Alan Sutherland

Abstract

The implications of local currency pricing (LCP) for monetary regime choice are analysed for a country facing foreign monetary shocks. In this analysis expenditure switching is potentially welfare reducing. This contrasts with the existing LCP literature, which focuses on productivity shocks and thus analyses a world where expenditure switching is welfare enhancing. This paper shows that, when home and foreign pro?ducers follow LCP, expenditure switching is absent and a floating rate is preferred by the home country. But when only home producers follow LCP, expenditure switching is present and a fixed rate can be welfare enhancing for the home country.

Suggested Citation

  • Ozge Senay & Alan Sutherland, 2010. "Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy," CDMA Working Paper Series 201005, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmawp:1005
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    File URL: http://www.st-andrews.ac.uk/~wwwecon/CDMA/papers/wp1005.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Liutang Gong & Chan Wang & Heng-fu Zou, 2017. "Optimal Exchange-Rate Policy in a Model of Local-Currency Pricing with Vertical Production and Trade," Open Economies Review, Springer, pages 125-147.
    2. Enzo Cassino & David Oxley, 2013. "How Does the Exchange Rate Affect the Real Economy? A Literature Survey," Treasury Working Paper Series 13/26, New Zealand Treasury.

    More about this item

    Keywords

    Monetary Policy; Foreign Monetary Shocks; Expenditure Switching; Exchange Rates; Local Currency Pricing; Reference Currency.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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