In which currency should exporters set their prices?

Friberg, Richard

doi:10.1016/s0022-1996(97)00035-4

Cited by 125 publications

(104 citation statements)

References 19 publications

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“…Assuming that nominal wages are rigid, the only impact of risk-sharing on the profit functions is through its effect on aggregate demand. Risk-sharing does not qualitatively alter the main 16 More generally, the following equilibria apply to firms from the large country. When (η − 1)(µ − 1) < 1 − γ all firms price in the exporter's currency.…”

Section: Iii3 Complete Asset Marketsmentioning

confidence: 96%

“…It can be shown that when the cyclicality parameter γ is larger than µ, and η < 2, all firms in both sectors in both countries price in the importer's currency. 16 An increase in the money supply raises the wage rate, but also leads to a depreciation, which increases demand when firms invoice in the exporter's currency. The positive correlation between wages and demand when firms invoice in the exporter's currency increases expected costs and lowers expected profits.…”

Section: Iii23 Stochastic Real Wagesmentioning

confidence: 99%

See 1 more Smart Citation

A theory of the currency denomination of international trade

Bacchetta

Wincoop

2005

Journal of International Economics

192

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Section: Iii3 Complete Asset Marketsmentioning

confidence: 96%

Section: Iii23 Stochastic Real Wagesmentioning

confidence: 99%

A theory of the currency denomination of international trade

Bacchetta

Wincoop

2005

Journal of International Economics

192

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“…Although this phenomenon has sometimes of late been characterized as pricing-to-market, it is distinct from the definition given above, and is best described as ''local-currency-pricing'' as in Devereux (1997). 11 44 Friberg (1998) has explored conditions under which it is be optimal for firms to invoice in the currency of the importer, as we assume. He likewise finds that a sufficient condition for firms to exhibit such invoicing behavior is that the demand have less convexity than the CES case.…”

Section: Pricing To Market and Preferencesmentioning

confidence: 99%

Pricing to Market, Staggered Contracts, and Real Exchange Rate Persistence

Feenstra¹,

Bergin²

1999

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A prominent question in international macroeconomics is why real exchange rates exhibit persistent deviations from purchasing power parity. Table 1 reiterates the basic findings of the preceding literature, using quarterly data for 1973-1997. 1 Averaging over countries, the onequarter autocorrelation is about 0.8, and that over four quarters is 0.27. 2 A related time-series literature concludes that the real exchange rate may be even more persistent. 3 In addition, the table shows the real exchange rate is quite volatile, with a standard deviation between four to five times that of output on average.Sticky prices are one explanation commonly offered for these real exchange rate movements. Monetary shocks could induce an immediate change in the nominal exchange rate, and this would translate into a change in the real exchange rate if national price levels remain fixed. Intertemporal models presenting this general view include Svensson and van Wijnbergen (1989), Obstfeld andKollmann (1996).A second explanation focuses on pricing-to-market, in which a firm intentionally sets different prices for its good across segmented national markets. 4 This explanation is consistent with empirical work by Engel (1993), Knetter (1993) and others, which have documented 4 The table closely resembles standard findings in the real business cycle literature: see Backus, Kehoe, and Kydland (1992), Chari, Kehoe and McGrattan (1998a), and Chang and Devereux (1998).5 All data are logged and Hodrick-Prescott filtered quarterly series. The real exchange rate is computed as the CPI-adjusted bilateral exchange rate with the U.S. dollar. If we do not Hodrick-Prescott filter the real exchange rate data, the average serial correlation naturally is much higher: 0.94 for one quarter and 0.71 for four quarters.6 See Froot and Rogoff (1995) for a summary of the time series literature. Several studies suggest real exchange rate deviations have a half-life of about four to five years. Some studies, such as Engel (1999), cast doubt on whether the real exchange rate is even mean reverting.7 A related explanation for deviations from the law of one price, suggested in Devereux (1997), is that prices are sticky in the local currency of the buyer.

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“…We say that g 1 is more informative than g 2 , expressed by g 1 inf g 2 , if there exists an integrable function, λ(y , y), such 5 See, for example, Kawai and Zilcha, 1986, Friberg, 1998, Wong, 2003a 6 that y y λ(y , y)dy = 1,…”

Section: Information and More Market Transparencymentioning

confidence: 99%

Information Value, Export and Hedging

Бролл¹,

Eckwert

2011

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The paper analyzes the interactions between the precision of information, trade and welfare within a decision framework of an exporting firm. Information in a financial market is described in terms of a publicly observable signal. With higher transparency, the signal conveys more precise information about the random foreign exchange rate. More precise information about exchange rate changes has ambiguous effects on trade and welfare which depend critically on technology of the firm and the degree of risk aversion. JEL-Classification: : F11, F23, G14, G15 Keywords: Exchange rate risk, trade, futures market, market transparency, value of information Terms of use: Documents in Information value, export and hedgingThe paper analyzes the interactions between the precision of information, trade and welfare within a decision framework of an exporting firm. Information in a financial market is described in terms of a publicly observable signal. With higher transparency, the signal conveys more precise information about the random foreign exchange rate. More precise information about exchange rate changes has ambiguous effects on trade and welfare which depend critically on technology of the firm and the degree of risk aversion.

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In which currency should exporters set their prices?

Cited by 125 publications

References 19 publications

A theory of the currency denomination of international trade

A theory of the currency denomination of international trade

Pricing to Market, Staggered Contracts, and Real Exchange Rate Persistence

Information Value, Export and Hedging

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