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Endogenous Exchange-Rate Pass-through and Self-Validating Exchange Rate Regimes

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  • Giancarlo Corsetti
  • Paolo Pesenti

Abstract

A long-standing question in open macroeconomics concerns the choice of currency denomination of nominal prices and contracts. This paper analyzes the interaction between firms’ export pricing and monetary policy, and discusses its potential macroeconomic implications for business cycle synchronization and the choice of an exchange rate regime. In the framework of a highly stylized monetary model, we provide an analytical characterization of the optimal export pricing by imperfectly monopolistic firms subject to nominal rigidities. We show that, when choosing the currency denomination of exports, firms optimize over the covariance between the log of the exchange rate and the inverse of the markup. Intuitively, the currency denomination of exports affects the exposure of firms’ marginal revenue to the shocks moving the exchange rate and demand in the destination markets.

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  • Giancarlo Corsetti & Paolo Pesenti, 2015. "Endogenous Exchange-Rate Pass-through and Self-Validating Exchange Rate Regimes," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 18(3), pages 62-89, December.
    • Handle: RePEc:chb:bcchec:v:18:y:2015:i:3:p:62-89
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    Cited by:

    1. Giancarlo Corsetti & Meredith Crowley & Lu Han & Huasheng Song, 2018. "Markets and Markups: A New Empirical Framework and Evidence on Exporters from China," Discussion Papers 1803, Centre for Macroeconomics (CFM).
    2. Enders, Almira & Enders, Zeno & Hoffmann, Mathias, 2018. "International financial market integration, asset compositions, and the falling exchange rate pass-through," Journal of International Economics, Elsevier, vol. 110(C), pages 151-175.
    3. Juliana Salomao & Liliana Varela, 2022. "Exchange Rate Exposure and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(1), pages 481-514.
    4. Yining Geng, 2020. "Impact of Family Planning Policy on Gender Inequality: Evidence from China," Working Papers 202008, University of Liverpool, Department of Economics.
    5. Liliana Varela & Juliana Salomao, 2016. "Exchange Rate Exposure and Firm Dynamics," Working Papers 2016-278-05, Department of Economics, University of Houston.
    6. Egemen Eren & Semyon Malamud, 2018. "Dominant Currency Debt," Swiss Finance Institute Research Paper Series 18-55, Swiss Finance Institute.
    7. Xia, Tian, 2020. "The role of intermediate goods in international monetary cooperation," Journal of International Money and Finance, Elsevier, vol. 100(C).
    8. Corsetti, G. & Han, L. & Crowley, M. & Song, H., 2018. "Markets and Markups: Evidence on the Rising Market Power of Exporters from China," Cambridge Working Papers in Economics 1815, Faculty of Economics, University of Cambridge.
    9. Yining Geng, 2020. "Impact of Family Planning Policy on Gender Inequality: Evidence from China," Working Papers 202009, University of Liverpool, Department of Economics.
    10. Giancarlo Corsetti & Meredith Crowley & Lu Han, 2020. "Invoicing and Pricing-to-market: Evidence on international pricing by UK exporters," Working Papers 202007, University of Liverpool, Department of Economics.

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