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Exchange rate appreciation expectation, importer's behavior and choice of invoicing currency: A theoretical model and Yen's empirical evidence

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  • Xiangyun Xu
  • Peng Guo
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    Abstract

    Purpose–The purpose of this paper is to develop a model to analyze the role of exchange rate appreciation expectation in trade invoicing from the perspective of importers, then empirically analyze it using Japanese export data. Design/methodology/approach–Constructing a theoretical model of importer behavior by analyzing the importer's utility function under an assumption such as “menu cost”, then using econometric method to justify the theoretical model's finding. Findings–It was found that under the assumption of “menu cost”, risk neutrality and price rigidity, there are three directions of appreciation expectation's effect: increasing, unchanged and decreasing theoretically; but under common condition, only a large appreciation expectation will cause an importer to reduce the use of exporter's currency, and the role is constricted by exporters' bargaining capacity. The empirical results of Yen's use in Japan's exports justifies the model's conclusion and shows that commercial pressure and political events are the most important signals to form large appreciation expectation. Practical implications–This paper has important policy implications for Renminbi (RMB)'s exchange rate policy under the context of RMB internationalization, in order to promote RMB's use in exports; China should control the large appreciation expectation of RMB and the best way is to rigorously tackle trade deficit with US and European countries, and to eliminate the explicit appreciation signal. Originality/value–The paper analyzes the role of exchange rate appreciation in trade invoicing theoretically and empirically for the first time; and reasonably explains the development of currency invoicing in Japanese exports and contemporary Chinese exports, as well as having important policy implications for Chinese exchange rate policy.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal China Finance Review International.

    Volume (Year): 2 (2012)
    Issue (Month): 3 (June)
    Pages: 231-245

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    Handle: RePEc:eme:cfripp:v:2:y:2012:i:3:p:231-245

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    Related research

    Keywords: Appreciation expectation; China; Commercial pressure; Currency options; Econometrics; Exchange rates; Importer's invoicing currency; Imports; Invoicing; Japan; Renminbi; Yen;

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    References

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    1. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
    2. Friberg, Richard & Wilander, Fredrik, 2008. "The currency denomination of exports -- A questionnaire study," Journal of International Economics, Elsevier, vol. 75(1), pages 54-69, May.
    3. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
    4. Linda S. Goldberg & Cedric Tille, 2005. "Vehicle currency use in international trade," Staff Reports 200, Federal Reserve Bank of New York.
    5. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010. "Currency Choice and Exchange Rate Pass-Through," American Economic Review, American Economic Association, vol. 100(1), pages 304-36, March.
    6. Bacchetta, Philippe & Van Wincoop, Eric, 2002. "A theory of the currency denomination of international trade," Working Paper Series 0177, European Central Bank.
    7. Shin-ichi Fukuda & Masanori Ono, 2006. "On the Determinants of Exporters' Currency Pricing: History vs. Expectations," CIRJE F-Series CIRJE-F-442, CIRJE, Faculty of Economics, University of Tokyo.
    8. Charles Engel, 2006. "Equivalence Results for Optimal Pass-Through, Optimal Indexing to Exchange Rates, and Optimal Choice of Currency for Export Pricing," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1249-1260, December.
    9. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
    10. Mitsuhiro Fukao, 2003. "Capital account liberalisation: the Japanese experience and implications for China," BIS Papers chapters, in: Bank for International Settlements (ed.), China's capital account liberalisation: international perspective, volume 15, pages 35-57 Bank for International Settlements.
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