In which currency should exporters set their prices?

This paper studies the choice of price setting currency for an exporter faced with the choice of setting price in his own, in the importers' or a third currency under exchange rate uncertainty. We establish that sufficient conditions on demand and cost functions for exchange rate pass-through to be less than unity under certainty are also sufficient conditions for price setting in the importer's currency to yield the highest expected profit under exchange rate uncertainty. Under the same conditions on demand and cost functions, setting price in the importer's currency maximizes expected utility when risk aversion and forward currency markets are introduced. (C) 1998 Elsevier Science B.V.