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Local currency pricing, foreign monetary shocks and exchange rate policy

Research output: Contribution to journalArticle

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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.
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Original languageEnglish
Pages (from-to)633-661
JournalOpen Economies Review
Volume26
Issue number4
Early online date17 May 2015
DOIs
Publication statusPublished - 1 Sep 2015

    Research areas

  • Monetary policy, Foreign monetary shocks, Expenditure switching, Exchange rates, Local currency pricing, Reference currency

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