TY  - JOUR
AU  - Engel,Charles
TI  - Expenditure Switching and Exchange Rate Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9016
PY  - 2002
Y2  - June 2002
UR  - http://www.nber.org/papers/w9016
L1  - http://www.nber.org/papers/w9016.pdf
N1  - Author contact info:
Charles Engel
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI  53706-1393
Tel: 608/262-3697
Fax: 608/262-2033
E-Mail: cengel@ssc.wisc.edu
M1  - published as Charles Engel. "Expenditure Switching and Exchange-Rate Policy," in Mark Gertler and Kenneth Rogoff, editors, "NBER Macroeconomics Annual 2002, Volume 17" MIT Press (2003)

AB  - Nominal exchange rate changes can lead to 'expenditure switching' when they change relative international prices.  A traditional argument for flexible nominal exchange rates posits that when prices are sticky in producers' currencies, nominal exchange rate movements can change relative prices between home and foreign goods.  But if prices are fixed ex ante in consumers' currencies, nominal exchange rate flexibility cannot achieve any relative price adjustment.  In that case nominal exchange rate fluctuations have the undesirable feature that they lead to deviations from the law of one price.  The case for floating exchange rates is weakened if prices are sticky in this way.  The empirical literature appears to support the notion that prices are sticky in consumers' currencies.  Here, additional support for this conclusion is provided.  We then review some new approaches in the theoretical literature that imply an important expenditure-switching role even when consumer prices are sticky in consumers' currencies.  Further empirical research is needed to resolve the quantitative importance of the expenditure-switching role for nominal exchange rates.
ER  -