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Currency Invoicing: The Role of 'Herding' and Exchange Rate Volatility

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  • Mark David Witte

Abstract

This paper analyzes an individual firm's choice of invoicing currency under exchange rate volatility. Greater exchange rate volatility amplifies the representative firm's desire to 'herd' relative to all other considerations that may affect the currency denomination decision. By 'herding' a firm chooses a currency of denomination so that the firm's price and the competition's price are affected by the exchange rate in a similar manner. Contrary to previous research, the results herein suggest that individual firms may invoice in a relatively volatile currency as long as its competitor's invoice in the same volatile currency.

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  • Mark David Witte, 2010. "Currency Invoicing: The Role of 'Herding' and Exchange Rate Volatility," International Economic Journal, Taylor & Francis Journals, vol. 24(3), pages 357-374.
    • Handle: RePEc:taf:intecj:v:24:y:2010:i:3:p:357-374
    DOI: 10.1080/10168730903510666
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    References listed on IDEAS

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    1. Black, Stanley W., 1991. "Transactions costs and vehicle currencies," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 512-526, December.
    2. Bacchetta, Philippe & van Wincoop, Eric, 2005. "A theory of the currency denomination of international trade," Journal of International Economics, Elsevier, vol. 67(2), pages 295-319, December.
    3. Devereux, Michael B. & Engel, Charles & Storgaard, Peter E., 2004. "Endogenous exchange rate pass-through when nominal prices are set in advance," Journal of International Economics, Elsevier, vol. 63(2), pages 263-291, July.
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    5. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
    6. Mark David Witte, 2009. "When is a Global Currency Optimal?," Global Economic Review, Taylor & Francis Journals, vol. 38(1), pages 1-11.
    7. Fukuda, Shin-ichi & Ono, Masanori, 2006. "On the determinants of exporters' currency pricing: History vs. expectations," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 548-568, December.
    8. Floden, Martin & Wilander, Fredrik, 2006. "State dependent pricing, invoicing currency, and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 70(1), pages 178-196, September.
    9. Choudhri, Ehsan U. & Faruqee, Hamid & Hakura, Dalia S., 2005. "Explaining the exchange rate pass-through in different prices," Journal of International Economics, Elsevier, vol. 65(2), pages 349-374, March.
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    Cited by:

    1. Straume, Hans-Martin, 2013. "Currency invoicing in Norwegian salmon export," Working Papers in Economics 11/13, University of Bergen, Department of Economics.

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