Currency Choice and Exchange Rate Pass-Through

TLDR

The paper develops a model of endogenous currency choice in a dynamic pricing environment to test its predictions against data. The authors construct a dynamic price model that endogenously determines currency choice and derive its predictions. Empirical evidence shows that exchange‑rate pass‑through is much higher for nondollar‑priced goods (≈95%) than for dollar‑priced goods (≈25%), a pattern that holds across countries and sectors and challenges models that treat pricing currency as exogenous. JEL codes: E31, F14, F31.

Abstract

We show, using novel data on currency and prices for US imports, that even conditional on a price change, there is a large difference in the exchange rate pass-through of the average good priced in dollars (25 percent) versus nondollars (95 percent). We document this to be the case across countries and within disaggregated sectors. This finding contradicts the assumption in an important class of models that the currency of pricing is exogenous. We present a model of endogenous currency choice in a dynamic price setting environment and show that the predictions of the model are strongly supported by the data. (JEL E31, F14, F31)