Currency invoicing and state-dependent pricing

Abstract

While invoicing currency has been extensively studied in open-economy macroeconomics, Dotsey and Duarte (2011) suggest that the currency denomination of exports does not matter because standard invoicing currency regimes such as producer currency pricing (PCP) and local currency pricing (LCP) generate similar aggregate responses. However, this paper demonstrates the importance of invoicing currency in a two-country state-dependent pricing (SDP) model with variable demand elasticity in response to monetary shocks. To highlight the role of SDP, I contrast the SDP model’s responses across invoicing regimes with those from a time-dependent pricing (TDP) model identical to SDP except exogenous price adjustment. While SDP gives rise to different aggregate responses across invoicing currency regimes, TDP, which Dotsey and Duarte (2011) use in their analysis, fails to make a difference in the aggregate responses except in trade balance.