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Vehicle currency use in international trade

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Author Info
Goldberg, Linda S.
Tille, Cédric

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Abstract

We explore the major driving forces for currency invoicing in international trade with a simple model and a novel dataset covering 24 countries. We contrasts a "coalescing" effect, where exporters minimize the movements of their prices relative to their competitors', with incentives to hedge macroeconomic volatility and transaction costs. The key determinants of invoice currency choice are industry features and country size, with some role for foreign-exchange bid-ask spreads. The coalescing effect also goes a long way to explaining the well-known dominance of the dollar. Trade flows to the United States are predominantly invoiced in dollar, as foreign exporters face competition with U.S. firms. The use of the dollar in trade flows that do not involve the United States reflects trade in homogeneous products where firms need to keep their price in line with their competitors'.

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File URL: http://www.sciencedirect.com/science/article/B6V6D-4T0FFCN-1/2/6615bd1873d8257e5465863346c898bd
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Publisher Info
Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 76 (2008)
Issue (Month): 2 (December)
Pages: 177-192
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Handle: RePEc:eee:inecon:v:76:y:2008:i:2:p:177-192

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Web page: http://www.elsevier.com/locate/inca/505552

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Related research
Keywords: Currency Invoicing Vehicle currency Pass-through Exchange rate Producer currency pricing Local currency pricing;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. John Murray & James Powell, 2002. "Dollarization in Canada: The Buck Stops There," Technical Reports 90, Bank of Canada. [Downloadable!]
  2. Shabtai Donnenfeld & Alfred Haug, 2003. "Currency Invoicing in International Trade: an Empirical Investigation," Review of International Economics, Blackwell Publishing, vol. 11(2), pages 332-345, 05. [Downloadable!] (restricted)
  3. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," NBER Working Papers 9543, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Paul R. Krugman, 1979. "Vehicle Currencies And the Structure Of International Exchange," NBER Working Papers 0333, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February. [Downloadable!] (restricted)
  6. Philippe Bacchetta & Eric van Wincoop, 2002. "A theory of the currency denomination of international trade," International Finance Discussion Papers 747, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  7. Cedric Tille, 2002. "How valuable is exchange rate flexibility? Optimal monetary policy under sectoral shocks," Staff Reports 147, Federal Reserve Bank of New York. [Downloadable!]
  8. Charles Engel & Kenneth D. West, 2003. "Exchange rates and fundamentals," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
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  9. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports 124, Federal Reserve Bank of New York. [Downloadable!]
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  10. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June. [Downloadable!] (restricted)
  11. Rey, Helene, 2001. "International Trade and Currency Exchange," Review of Economic Studies, Blackwell Publishing, vol. 68(2), pages 443-64, April.
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  12. Bacchetta, Philippe & van Wincoop, Eric, 2002. "A Theory of Currency Denomination of International Trade," CEPR Discussion Papers 3120, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Charles Engel, 2004. "On the Relationship between Pass-Through and Sticky Nominal Prices," Working Papers 112004, Hong Kong Institute for Monetary Research. [Downloadable!]
  14. Shabtai Donnenfeld & Alfred A. Haug, 2001. "Currency Invoicing of U.S. Imports," Working Papers 2002_11, York University, Department of Economics, revised Apr 2002. [Downloadable!]
    Other versions:
  15. Robert Anderton, 2003. "Extra-euro area manufacturing import prices and exchange rate pass-through," Working Paper Series 219, European Central Bank. [Downloadable!]
  16. Michael B. Devereux & Charles Engel, 2001. "Endogenous Currency of Price Setting in a Dynamic Open Economy Model," NBER Working Papers 8559, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. John Murray & James Powell & Louis-Robert Lafleur, 2003. "Dollarization in Canada: An Update," Bank of Canada Review, Bank of Canada, vol. 2003(Summer), pages 29-34. [Downloadable!]
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