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Which currency to set price? A model of multiple countries and risk averse firm

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  • Jian Wang

    (Department of Economics, University of Wisconsin, Madison)

Abstract

A crucial question centering many recent debates in the international macroeconomics is under which currency the price is sticky. This paper provides a microfoundation to study the firm¡¦s choice of price setting currency in the sticky price model. I first prove that the risk preference is a secondary consideration in the choice of the price setting currency. This result questions the claim that the currency forward market can change the currency choice of risk averse firms. Then I extend the discussion to a model with multiple importing countries. Unlike the single-importing-country model, the optimal choice of the price setting currency also depends on the variance and covariance of the log exchange rates. This result connects the firm¡¦s currency choice to the macro variables. This interaction should be endoginized in the open macroeconomic models when studying some important questions like the choice of optimal exchange rate regime.

Suggested Citation

  • Jian Wang, 2004. "Which currency to set price? A model of multiple countries and risk averse firm," International Finance 0410004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0410004
    Note: Type of Document - pdf; pages: 33
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0410/0410004.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    pricing to market; local currency pricing; producer currency pricing; risk averse; multinational companies;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F30 - International Economics - - International Finance - - - General

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