Effects of the Exchange-Rate Regime on Trade under Monetary Uncertainty: The Role of Price Setting

Alexander Mihailov ()

No 566, Economics Discussion Papers from University of Essex, Department of Economics

Abstract: In a baseline stochastic new open-economy macroeconomics (NOEM) model which parallels alternative invoicing conventions, namely consumer's currency pricing (CCP) vs. producer's currency pricing (PCP), we revisit the question whether the exchange-rate regime matters for trade. We show analytically that under full symmetry, only money shocks and separable but otherwise very general utility, it is irrelevant in affecting expected trade-to-output ratios. A peg-float comparison is nevertheless meaningful under PCP, although not CCP, in terms of volatility of national trade shares: by shutting down the pass-through and expenditure-switching channel, a peg then stabilizes equilibrium trade-to-GDP at its expected level.

New Economics Papers: this item is included in nep-ifn, nep-mfd and nep-mon
Date: 2003-10-28
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