Local currency pricing, foreign monetary shocks and exchange rate policy

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    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 producers 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.
    Original languageEnglish
    Pages (from-to)633-661
    JournalOpen Economies Review
    Volume26
    Issue number4
    Early online date17 May 2015
    DOIs
    Publication statusPublished - 1 Sept 2015

    Keywords

    • Monetary policy
    • Foreign monetary shocks
    • Expenditure switching
    • Exchange rates
    • Local currency pricing
    • Reference currency

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