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The choice of an invoicing currency in international trade and the balance of trade impact of currency depreciation

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Author Info

  • Michael Melvin
  • Jahangir Sultan

Abstract

Cross-country differences in the choice of an invoicing currency in international trade is one reason for cross-country differences in estimated exchange rate coefficients in short-run balance of trade equations. If exports are invoiced in domestic currency while imports are invoiced in a foreign currency, a depreciation will increase the domestic currency value of outstanding import contracts, and may cause the balance of trade to fall in the short run. Countries with different invoicing patterns will have different effects on the short-run trade balance following a depreciation. We explore a simple theory of invoicing currency choice, drawing inferences regarding the likely choices for 14 countries. This allows a classification of countries according to the expected short-run balance of trade effect of a currency depreciation. Empirical estimates support the hypothesized groupings based on suggested currency invoicing patterns. Copyright Kluwer Academic Publishers 1990

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File URL: http://hdl.handle.net/10.1007/BF01886158
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 1 (1990)
Issue (Month): 3 (October)
Pages: 251-268

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Handle: RePEc:kap:openec:v:1:y:1990:i:3:p:251-268

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: exchange rates; international trade; invoicing practices;

References

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  1. Catherine L. Mann, 1986. "Prices, profit margins, and exchange rates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 366-379.
  2. Baron, David P, 1976. "Fluctuating Exchange Rates and the Pricing of Exports," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 425-38, September.
  3. Bahmani-Oskooee, Mohsen, 1985. "Devaluation and the J-Curve: Some Evidence from LDCs," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 500-504, August.
  4. McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098.
  5. Moffett, Michael H., 1989. "The J-curve revisited: an empirical examination for the United States," Journal of International Money and Finance, Elsevier, vol. 8(3), pages 425-444, September.
  6. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
  7. Fisher, Eric, 1989. "A model of exchange rate pass-through," Journal of International Economics, Elsevier, vol. 26(1-2), pages 119-137, February.
  8. Aliber, Robert Z, 1976. " The Firm under Pegged and Floating Exchange Rates," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 309-22.
  9. Miles, Marc A, 1979. "The Effects of Devaluation on the Trade Balance and the Balance of Payments: Some New Results," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 600-20, June.
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Citations

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Cited by:
  1. Ligthart, Jenny E. & Werner, Sebastian E. V., 2012. "Has the Euro affected the choice of invoicing currency?," Working Paper Series 1414, European Central Bank.
  2. Ayoub Yousefi, 2000. "Merchandise Trade Balances of Less Developed Countries and Exchange Rate of the U.S. Dollar: Cases of Iran, Venezuela & Saudi Arabia," Working Papers 00002, University of Waterloo, Department of Economics, revised Feb 2000.
  3. Ligthart, J.E. & Da Silva, J., 2007. "Currency Invoicing in International Trade: A Panel Data Approach," Discussion Paper 2007-25, Tilburg University, Center for Economic Research.
  4. Yousefi, Ayoub & Wirjanto, Tony S., 2003. "Exchange rate of the US dollar and the J curve: the case of oil exporting countries," Energy Economics, Elsevier, vol. 25(6), pages 741-765, November.

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