Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy

Ozge Senay and Alan Sutherland ()

Open Economies Review, 2015, vol. 26, issue 4, 633-661

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. Copyright Springer Science+Business Media New York 2015

Keywords: Monetary policy; Foreign monetary shocks; Expenditure switching; Exchange rates; Local currency pricing; Reference currency; E52; F41; F42 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Working Paper: Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy (2010)
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DOI: 10.1007/s11079-015-9356-x

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