Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 128: On the Role of Pricing Exports in a Third Currency

Richard Friberg ()
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Richard Friberg: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden

Abstract: The share of Swedish exports that are invoiced in U.S. dollars has doubled comparing a sample from 1968 with figures from 1993. There has been no corresponding increase in Swedish trade with the United States. This serves as motivation for our interest in price setting/invoicing in a third currency. We investigate the role of pricing in the importers', exporter's or a third currency in a simple model with pre-set prices. The firm of study is a risk neutral monopolist exporter who faces a linear demand curbe. Expected prices, quantities and profits depend on the price setting currency chosen. Also the curvature of realised profits as a function of exchange rate surprises depends on the price setting currency chosen. In an extension we discuss the role of competition from a third country in a model of Bertrand competition in differentiated goods.

Keywords: Invoicing; exchange rate fluctuations; pricing of exports

JEL-codes: F14; F23

35 pages, September 1996

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