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Local currency pricing, foreign monetary shocks and exchange rate policy

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senay_sutherland_paper_final.pdf (357.2Kb)
Date
01/09/2015
Author
Senay, Ozge
Sutherland, Alan
Funder
Economic & Social Research Council
Grant ID
ES/I024174/1
Keywords
Monetary policy
Foreign monetary shocks
Expenditure switching
Exchange rates
Local currency pricing
Reference currency
HB Economic Theory
BDC
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Abstract
The implications of local currency pricing (LCP) for monetary regime choice are analysed for a country facing foreign monetary shocks. In this analysis expenditure switching is potentially welfare reducing. This contrasts with the existing LCP literature, which focuses on productivity shocks and thus analyses a world where expenditure switching is welfare enhancing. This paper shows that, when home and foreign producers follow LCP, expenditure switching is absent and a floating rate is preferred by the home country. But when only home producers follow LCP, expenditure switching is present and a fixed rate can be welfare enhancing for the home country.
Citation
Senay , O & Sutherland , A 2015 , ' Local currency pricing, foreign monetary shocks and exchange rate policy ' , Open Economies Review , vol. 26 , no. 4 , pp. 633-661 . https://doi.org/10.1007/s11079-015-9356-x
Publication
Open Economies Review
Status
Peer reviewed
DOI
https://doi.org/10.1007/s11079-015-9356-x
ISSN
0923-7992
Type
Journal article
Rights
© Springer Science+Business Media New York 2015. This is the author's accepted version of this work. The final publication is available at Springer via http://dx.doi.org/10.1007/s11079-015-9356-x
Description
This research was supported by ESRC [grant number ES/I024174/1]
Collections
  • University of St Andrews Research
URI
http://hdl.handle.net/10023/8811

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