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