IN WHICH CURRENCY SHOULD EXPORTERS SET THEIR PRICES

This paper studies the choice of price setting currency for an exporte r faced with the choice of setting price in his own, in the importers' or a third currency under exchange rate uncertainty. We establish tha t sufficient conditions on demand and cost functions for exchange rate pass-through to be less than unity under certainty are also sufficien t conditions for price setting in the importer's currency to yield the highest expected profit under exchange rate uncertainty. Under the sa me conditions on demand and cost functions, setting price in the impor ter's currency maximizes expected utility when risk aversion and forwa rd currency markets are introduced. (C) 1998 Elsevier Science B.V.