Working Paper: NBER ID: w27647
Authors: Andres Drenik; Diego Perez
Abstract: This paper studies the dollarization of prices in retail markets of emerging economies. We develop a model of the firm’s optimal currency choice in retail markets in inflationary economies. We derive theoretical predictions regarding the optimality of dollar pricing, and test them using data from the largest e-trade platform in Latin America. Across countries, price dollarization is positively correlated with asset dollarization and inflation, and negatively correlated with exchange rate volatility. At the micro level, larger sellers are more likely to price in dollars, and more tradeable goods are more likely to be posted in dollars. We then show that prices are sticky, and hence the currency of prices determines the short-run reaction of both prices and quantities to a nominal exchange rate shock.
Keywords: Dollarization; Emerging Economies; Exchange Rate; Inflation; Retail Markets
JEL Codes: E31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price dollarization (F31) | asset dollarization (F31) |
| price dollarization (F31) | exchange rate volatility (F31) |
| seller size (L81) | price dollarization (F31) |
| tradeable goods (F19) | price dollarization (F31) |
| currency choice (F31) | short-run reaction of prices and quantities to nominal exchange rate shocks (F31) |