Arbeitspapier
Expenditure-switching effect and the choice of exchange rate regime
The author investigates the quantitative importance of the expenditure-switching effect by developing and estimating a structural sticky-price model nesting both producer currency pricing (PCP) and local currency pricing (LCP) settings. The author aims to provide empirical evidence of the magnitude of the benefits to be gained from exchange rate flexibility in terms of expenditure switching, and to contribute to the ongoing debate regarding the optimal exchange rate regime. In the author's model, the size of the expenditure-switching effect is determined by the degree of price stickiness, the fraction of firms employing PCP versus LCP, the distribution margin, and the elasticity of substitution between domestic and foreign tradable goods. The model is estimated for three small open economies: Australia, Canada, and the United Kingdom. The empirical results suggest that, among the three countries, the magnitude of the expenditure switching by domestic agents is relatively small for the United Kingdom, and comparatively large for Canada; the distribution margin in the United Kingdom is exceptionally high, which limits the degree of domestic expenditure switching initiated by nominal exchange rate movements. Moreover, expenditure switching by foreign distributors is comparatively small for Australia and Canada, since a larger fraction of Australian and Canadian firms adopt LCP for their export pricesetting.
- Language
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Englisch
- Bibliographic citation
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Series: Bank of Canada Working Paper ; No. 2007-54
- Classification
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Wirtschaft
- Subject
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Exchange rate regimes
International topics
Wechselkurssystem
Flexibler Wechselkurs
Preisrigidität
Substitutionselastizität
Handelbares Gut
Australien
Kanada
Großbritannien
Theorie
- Event
-
Geistige Schöpfung
- (who)
-
Dong, Wei
- Event
-
Veröffentlichung
- (who)
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Bank of Canada
- (where)
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Ottawa
- (when)
-
2007
- DOI
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doi:10.34989/swp-2007-54
- Handle
- Last update
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10.03.2025, 11:46 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Dong, Wei
- Bank of Canada
Time of origin
- 2007
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