Trade Flows, Prices, and The Exchange Rate Regime
This paper examines the relationship between the exchange rate regime and trade flows using a general equilibrium model based on Bacchetta and van Wincoop (AER, 2000). We show that in general the link between trade and the exchange rate regime is ambiguous and that it depends in particular on the nature of macroeconomic shocks and consumer preferences. A critical aspect is the pricing strategy adopted by monopolistically competitve firms. Trade is more likely to be affected by the exchange rate regime if firms price in buyers' currency, or price to market (PTM), than if they price in producers' currency (PCP). We show, however, that PCP is not an equilibrium under reasonable parameters when international capital markets are not available. In contrast, when markets become more complete, firms tend to switch to PCP.
|Date of creation:||Nov 2000|
|Contact details of provider:|| Postal: Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee|
Phone: ++41 (0)31 780 31 31
Fax: ++41 (0)31 780 31 00
Web page: http://www.szgerzensee.ch/
|Order Information:|| Postal: Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee|