Publications
- Currency Choice and Exchange Rate Pass-through
- Download: PDF 411.7 KB
- by Gopinath, Gita; Itskhoki, Oleg; Rigobon, Roberto
- 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.
- Publication Type: WCFIA Working Paper
- Published Date: September 2007
- Field of Interest: International Economics
- Gopinath, Gita, Oleg Itskhoki, and Roberto Rigobon. "Currency Choice and Exchange Rate Pass-through." Working Paper 2008-0033, Weatherhead Center for International Affairs, Harvard University, September 2007.
