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Macroeconomic interdependence and the international role of the dollar

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  • Goldberg, Linda
  • Tille, Cédric

Abstract

The U.S. dollar holds a dominant place in the invoicing of international trade. In addition to a direct role for most U.S. exports and imports, it plays a global role for trade flows outside the United States. Using a simple center-periphery model, we show that this global role magnifies the exposure of periphery countries to the U.S.'s monetary policy even when trade flows with the U.S. are limited. This generates gains from coordinated monetary policy, as U.S. policy leads to inefficient movements in intra-periphery relative prices. Despite this inefficiency, flexible exchange rates remain valuable.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 7 (October)
Pages: 990-1003

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Handle: RePEc:eee:moneco:v:56:y:2009:i:7:p:990-1003

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Exchange rate Pass-through Center-periphery Invoicing Monetary policy;

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References

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  1. Cook, David & Devereux, Michael B, 2004. "External Currency Pricing and the East Asian Crisis," CEPR Discussion Papers 4642, C.E.P.R. Discussion Papers.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt6412m5b7, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Campa, José Manuel & Goldberg, Linda S, 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers 4391, C.E.P.R. Discussion Papers.
  4. Joseph E. Gagnon & Jane Ihrig, 2004. "Monetary policy and exchange rate pass-through This article is a U.S. Government work and is in the public domain in the U.S.A," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 315-338.
  5. 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.
  6. Hamid Faruqee & Dalia Hakura & Ehsan U. Choudhri, 2002. "Explaining the Exchange Rate Pass-Through in Different Prices," IMF Working Papers 02/224, International Monetary Fund.
  7. Goldberg, Linda & Tille, Cédric, 2009. "Macroeconomic interdependence and the international role of the dollar," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(7), pages 990-1003, October.
  8. Devereux, Michael B & Shi, Kang & Xu, Juanyi, 2004. "Global Monetary Policy Under a Dollar Standard," CEPR Discussion Papers 4317, C.E.P.R. Discussion Papers.
  9. Giancarlo Corsetti & Paolo Pesenti, 2005. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Working Papers 11341, National Bureau of Economic Research, Inc.
  10. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  11. Philippe Bacchetta & Eric van Wincoop, 2002. "A theory of the currency denomination of international trade," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 747, Board of Governors of the Federal Reserve System (U.S.).
  12. Linda S. Goldberg & Cedric Tille, 2005. "Vehicle Currency Use in International Trade," NBER Working Papers 11127, National Bureau of Economic Research, Inc.
  13. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports 124, Federal Reserve Bank of New York.
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Citations

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Cited by:
  1. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2010. "Exchange Rate Flexibility Across Financial Crises," Working Papers 2010-08, CEPII research center.
  2. Piffaretti, Nadia F., 2008. "Reshaping the International Monetary Architecture and Addressing Global Imbalances: Lessons from the Keynes Plan," MPRA Paper 12165, University Library of Munich, Germany.
  3. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2007. "Optimal Monetary Policy and the Sources of Local-Currency Price Stability," CEPR Discussion Papers 6557, C.E.P.R. Discussion Papers.
  4. Stéphane Auray & Beatriz de Blas & Aurélien Eyquem, 2009. "Ramsey Policies in a Small Open Economy with Sticky Prices and Capital," Cahiers de recherche, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke 09-12, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  5. Linda S. Goldberg & Cédric Tille, 2008. "Macroeconomic Interdependence and the International Role of the Dollar," NBER Working Papers 13820, National Bureau of Economic Research, Inc.
  6. McCauley, Robert & McGuire, Patrick & von Peter, Goetz, 2012. "After the global financial crisis: From international to multinational banking?," Journal of Economics and Business, Elsevier, vol. 64(1), pages 7-23.
  7. Canzoneri, Matthew & Cumby, Robert & Diba, Behzad & López-Salido, David, 2013. "Key currency status: An exorbitant privilege and an extraordinary risk," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 371-393.
  8. Virginie Coudert, 2009. "Mythes et réalités de la « zone dollar »," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 94(1), pages 151-169.
  9. repec:hal:wpaper:hal-00845254 is not listed on IDEAS
  10. Chan Wang & Heng-fu Zou, 2013. "Optimal monetary policy in open economies: the role of reference currency in vertical production and trade," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 586, China Economics and Management Academy, Central University of Finance and Economics.
  11. Kai Liu, 2014. "Dollar Hegemony and China’s Economy," Cambridge Working Papers in Economics 1410, Faculty of Economics, University of Cambridge.
  12. Matthew Canzoneri & Robert E. Cumby & Behzad Diba & David Lopez-Salido, 2008. "The Macroeconomic Implications of a Key Currency," NBER Working Papers 14242, National Bureau of Economic Research, Inc.
  13. Ozge Senay & Alan Sutherland, 2010. "Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy," CDMA Working Paper Series 201005, Centre for Dynamic Macroeconomic Analysis.

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