TY - JOUR AU - Gopinath,Gita AU - Itskhoki,Oleg AU - Rigobon,Roberto TI - Currency Choice and Exchange Rate Pass-through JF - National Bureau of Economic Research Working Paper Series VL - No. 13432 PY - 2007 Y2 - September 2007 UR - http://www.nber.org/papers/w13432 L1 - http://www.nber.org/papers/w13432.pdf N1 - Author contact info: Gita Gopinath Department of Economics Harvard University 1875 Cambridge Street Littauer 206 Cambridge, MA 02138 Tel: 617/495-8161 Fax: 617/495-7730 E-Mail: gopinath@harvard.edu Oleg Itskhoki Department of Economics Princeton University Fisher Hall 306 Princeton, NJ 08544-1021 Tel: 609/258-5493 Fax: 609/258-6419 E-Mail: itskhoki@princeton.edu Roberto Rigobon MIT Sloan School of Management 100 Main Street, E62-516 Cambridge, MA 02142 Tel: 617/258-8374 Fax: 617/258-6855 E-Mail: rigobon@mit.edu AB - A central assumption of open economy macro models with nominal rigidities relates to the currency in which goods are priced, whether there is so-called producer currency pricing or local currency pricing. This has important implications for exchange rate pass-through and optimal exchange rate policy. We show, using novel transaction level information on currency and prices for U.S. imports, that even conditional on a price change, there is a large difference in the pass-through of the average good priced in dollars (25%) versus non-dollars (95%). This finding is contrary to the assumption in a large class of models that the currency of pricing is exogenous and is evidence of an important selection effect that results from endogenous currency choice. We describe a model of optimal currency choice in an environment of staggered price setting and show that the empirical evidence strongly supports the model's predictions of the relation between currency choice and pass-through. We further document evidence of significant real rigidities, with the pass-through of dollar pricers increasing above 50% in the long-run. Lastly, we numerically illustrate the currency choice decision in both a Calvo and a menu-cost model with variable mark-ups and imported intermediate inputs and evaluate the ability of these models to match pass-through patterns documented in the data. ER -