Foreign Trade Pricing and Consistency of a Monetary Union

Raphaëlle Bellando and Jean-Paul Pollin

Revue économique, 2003, vol. 54, issue 5, 1117-1136

Abstract: Strong differences as regards the price determination of exports can be seen in the euro zone. Some countries seem to use local pricing: they set their selling price in the purchaser?s currency, so local-currency export prices are then very sensitive to exchange-rate fluctuations. Others on the contrary find it easier to impose their price in local currency. We try to modelize this heterogeneity within a very simple framework: we figure out a two-country monetary union, one of them is price-taker for its exports and the other is price-maker. We then examine the consequences of an exchange shock against the rest of the world. As far as reactions to this shock are asymmetric, the Central Bank, having as its objective the average inflation of the union, might strengthen the negative impact of such a shock, at least in one of the two countries.

Date: 2003
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