Pricing in Multiple Currencies in Domestic Markets
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Andres Drenik: Columbia University
No 1418, 2017 Meeting Papers from Society for Economic Dynamics
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.
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1418
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