Optimal Policy under Dollar Pricing

Abstract

Empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model with general preferences, technologies, asset markets, nominal rigidities, and a rich set of shocks. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting and a floating exchange rate remain robustly optimal in non-US economies. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. International cooperation benefits other economies, but is not in the self-interest of the United States. (JEL E31, E52, F14, F31, F38, F41)

The Causal Effects of Expected Depreciations

“…Using Colombian data from the same source we exploit in this paper, Gopinath et al (2020) find that trade in Colombia is almost exclusively invoiced in dollars. Egorov and Mukhin (2023) study the implications of pricing in the dominant currency for monetary policy. Devereux and Engel (2007) highlight the importance of intermediate inputs pricing to understanding the aggregate effects of exchange rate policy.…”

“…The main contribution of this paper is to estimate the elasticity of firm-level outcomes to an expected future depreciation. These elasticities are useful to discipline the strength of different mechanisms present in models of international economics (Egorov and Mukhin, 2023). These firm-level effects will be estimated using variation in exchange rate expectations generated through an informational randomized controlled trial (RCT), which complements existing estimates of the elasticities of aggregate outcomes using cross-country data.…”