Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/127998
Authors: 
Bacchetta, Philippe
van Wincoop, Eric
Year of Publication: 
2000
Series/Report no.: 
Working Paper, Study Center Gerzensee 00.11
Abstract: 
This paper examines the relationship between the exchange rate regime and trade flows using a general equilibrium model based on Bacchetta and van Wincoop (AER, 2000). We show that in general the link between trade and the exchange rate regime is ambiguous and that it depends in particular on the nature of macroeconomic shocks and consumer preferences. A critical aspect is the pricing strategy adopted by monopolistically competitive firms. Trade is more likely to be affected by the exchange rate regime if firms price in buyers' currency, or price to market (PTM), than if they price in producers' currency (PCP). We show, however, that PCP is not an equilibrium under reasonable parameters when international capital markets are not available. In contrast, when markets become more complete, firms tend to switch to PCP.
JEL: 
F31
F33
F41
Document Type: 
Working Paper

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