Pricing in Multiple Currencies in Domestic Markets

We document that a significant fraction of prices in domestic markets of emerging economies are set in dollars. The currency of prices is not homogeneous across goods. More expensive goods are more likely to be set in dollars. We rationalize these facts using a model of price setting in multiple currencies with search frictions. Pricing in dollars prevents erosion of real prices caused by domestic inflation at the expense of a lower willingness to pay from buyers. Dollar-pricing is more likely for expensive goods since these goods take longer to sell and are likely to be bought by buyers with easier access to dollars. We analyze the effects of changes in the inflation rate on the currency denomination of prices. Drenik: [email protected]. Perez: [email protected]. We thank Peter Diamond, Guido Menzio and seminar participants at Columbia University and the 2017 SED Meeetings for valuable comments. We also thank Gustavo Pereira for excellent research assistance. PRICING IN MULTIPLE CURRENCIES IN DOMESTIC MARKETS 1