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Pricing in Multiple Currencies in Domestic Markets

Andres Drenik
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Andres Drenik: Columbia University

No 1418, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We document that in emerging economies a significant fraction of prices in do- mestic markets are set in dollars. The currency of prices is not homogeneous across goods. More expensive goods are more likely to be set in dollars and also take longer time to sell. We rationalize these facts using a model of price setting in multiple currencies with search frictions. Pricing in dollars prevents erosion of real prices caused by inflation at the expense of a lower willingness to pay from buyers. When goods take longer to sell the relative value of preventing price erosion is higher. Consistent with empirical evidence, our model predicts that the share of prices in foreign currency increases when domestic inflation is high.

New Economics Papers: this item is included in nep-dge, nep-mkt and nep-mon
Date: 2017
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