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Which currency to set price? A model of multiple countries and risk averse firm

Listed author(s):
  • Jian Wang

    (Department of Economics, University of Wisconsin, Madison)

Registered author(s):

    A crucial question centering many recent debates in the international macroeconomics is under which currency the price is sticky. This paper provides a microfoundation to study the firm¡¦s choice of price setting currency in the sticky price model. I first prove that the risk preference is a secondary consideration in the choice of the price setting currency. This result questions the claim that the currency forward market can change the currency choice of risk averse firms. Then I extend the discussion to a model with multiple importing countries. Unlike the single-importing-country model, the optimal choice of the price setting currency also depends on the variance and covariance of the log exchange rates. This result connects the firm¡¦s currency choice to the macro variables. This interaction should be endoginized in the open macroeconomic models when studying some important questions like the choice of optimal exchange rate regime.

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    File URL: http://econwpa.repec.org/eps/if/papers/0410/0410004.pdf
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    Paper provided by EconWPA in its series International Finance with number 0410004.

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    Length: 33 pages
    Date of creation: 20 Oct 2004
    Handle: RePEc:wpa:wuwpif:0410004
    Note: Type of Document - pdf; pages: 33
    Contact details of provider: Web page: http://econwpa.repec.org

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    1. Michael Devereux & Charles Engel, 2000. "The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production," Discussion Papers in Economics at the University of Washington 0022, Department of Economics at the University of Washington.
    2. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
    3. Obstfeld, Maurice, 1998. " Open-Economy Macroeconomics: Developments in Theory and Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 247-275, March.
    4. Ethier, Wilfred, 1973. "International Trade and the Forward Exchange Market," American Economic Review, American Economic Association, vol. 63(3), pages 494-503, June.
    5. Robert P. Flood & Andrew K. Rose, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," NBER Working Papers 4503, National Bureau of Economic Research, Inc.
    6. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," NBER Working Papers 9543, National Bureau of Economic Research, Inc.
    7. Peter B. Clark, 1973. "Uncertainty, Exchange Risk, And The Level Of International Trade," Economic Inquiry, Western Economic Association International, vol. 11(3), pages 302-313, 09.
    8. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, vol. 20(1-2), pages 83-98, February.
    9. Feenstra, R.C. & Kendall, J.D., 1994. "Pass-Through of Exchange Rates and Purchasing Power Parity," Papers 1994-06, Tasmania - Department of Economics.
    10. Donnenfeld, S. & Zilcha, I., 1989. "Pricing Of Exports And Exchange Rate Uncertainty," Papers 12-89, Tel Aviv.
    11. Praveen Kumar, 1988. "Shareholder-Manager Conflict and the Information Content of Dividends," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 111-136.
    12. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
    13. Baron, David P, 1976. "Fluctuating Exchange Rates and the Pricing of Exports," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 425-438, September.
    14. S. Waite Rawls & Charles W. Smithson, 1990. "Strategic Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 2(4), pages 6-18.
    15. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
    16. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
    17. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
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