Local currency pricing, foreign monetary shocks and exchange rate policy
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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.
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 . DOI: 10.1007/s11079-015-9356-x
Open Economies Review
© 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
This research was supported by ESRC [grant number ES/I024174/1]
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