NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Determinants of Exporters' Currency Pricing: History vs. Expectations

Shin-ichi Fukuda, Masanori Ono

NBER Working Paper No. 12432
Issued in August 2006
NBER Program(s):IFM, ITI

The purpose of this paper is to investigate why the choice of invoice currency under exchange rate uncertainty depends not only on expectations but also on history. The analysis is motivated by the fact that the U.S. dollar has historically been the dominant vehicle currency in developing countries. The theoretical analysis is based on an open economy model of monopolistic competition. When the market is competitive enough, the exporting firms tend to set their prices not to deviate from those of the competitors. As a result, a coordination failure can lead the third currency to be a less efficient equilibrium invoice currency. The role of expectations is important in selecting the equilibrium in the static framework. However, in the dynamic model with staggered price-setting, the role of history becomes another key determinant of the equilibrium currency pricing. The role of history may dominate the role of expectations when the firms are myopic, particularly in the competitive local market. It also becomes dominant in the staggered price setting when a small fraction of the new price setters are backward-looking. The result suggests the importance of history in explaining why the firm tends to choose the US dollar as vehicle currency.

download in pdf format
   (218 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12432

Published: Fukuda, Shin-ichi & Ono, Masanori, 2006. "On the determinants of exporters' currency pricing: History vs. expectations," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 548-568, December. citation courtesy of

Users who downloaded this paper also downloaded* these:
Goldberg and Tille w11127 Vehicle Currency Use in International Trade
Ito, Koibuchi, Sato, and Shimizu w16231 Why has the yen failed to become a dominant invoicing currency in Asia? A firm-level analysis of Japanese Exporters' invoicing behavior
Bacchetta and van Wincoop w9039 A Theory of the Currency Denomination of International Trade
Goldberg Trade Invoicing in the Accession Countries: Are They Suited to the Euro?
Krugman The International Role of the Dollar: Theory and Prospect
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us