Dollar pricing redux

Camila Casas, Federico Díez, Gita Gopinath and Pierre-Olivier Gourinchas

No 653, BIS Working Papers from Bank for International Settlements

Abstract: A country's exchange rate is at the center of economic and political debates on currency wars and trade competitiveness. The real consequences of exchange rate fluctuations depend critically on how firms set prices in international markets. Recent empirical evidence has challenged the dominant 'producer currency' pricing and 'local currency' pricing paradigms in the literature. In this paper we propose a new paradigm, consistent with the empirical evidence and characterized by three features: pricing in dollars, strategic complementarity in pricing and imported inputs in production. We call this the 'dollar pricing' paradigm and contrast its theoretical predictions with prior approaches in a general equilibrium New Keynesian model. We then employ novel data for Colombia to evaluate the implications of exchange rate fluctuations associated with commodity price shocks and show that the findings strongly support the dollar pricing paradigm.

Keywords: dominant currency; terms of trade; pass-through; monetary policy (search for similar items in EconPapers)
JEL-codes: F1 F2 F3 F4 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2017-08
New Economics Papers: this item is included in nep-ifn and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:653

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