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Vehicle currency use in international trade

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Author Info
Linda S. Goldberg
Cedric Tille

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Abstract

Although currency invoicing in international trade transactions is central to the transmission of monetary policy, the forces motivating the choice of currency have long been debated. We introduce a model wherein agents involved in international trade can invoice in the exporter's currency, the importer's currency, or a third-country vehicle currency. The model is designed to contrast the contribution of macroeconomic variability with that of industry-specific features in the selection of an invoice currency. We show that producers in industries with high demand elasticities are more likely than producers in other industries to display herding in their choice of currency. This industry-related force is more influential than local macroeconomic performance in determining producers' choices. ; Drawing on data on invoice currency use in exports and imports for twenty-four countries, we document that the dollar is the currency of choice for most transactions involving the United States. The dollar is also extensively used as a vehicle currency in international trade flows that do not directly involve the United States. Consistent with the results of our model, this last finding is largely attributable to international trade in reference-priced goods and goods traded on organized exchanges. Although the magnitude of business cycle volatility matters for invoicing of more differentiated products, it is less central for invoicing nondifferentiated goods.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 200.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:200

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Keywords: Currency substitution International trade Dollar American

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This paper has been announced in the following NEP Reports: 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. 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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  9. 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)
  10. 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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  11. 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)
  12. 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!]
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  13. Robert Anderton, 2003. "Extra-euro area manufacturing import prices and exchange rate pass-through," Working Paper Series 219, European Central Bank. [Downloadable!]
  14. 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)
  15. John Murray & James Powell & Louis-Robert Lafleur, 2003. "Dollarization in Canada: An Update," Bank of Canada Review, Bank of Canada, vol. 127(Summer), pages 29-34. [Downloadable!]
Full references

Cited by:
(explanations, 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. Prakash Kannan, 2007. "On the Welfare Benefits of an International Currency," IMF Working Papers 07/49, International Monetary Fund. [Downloadable!]
  2. Linda S. Goldberg, 2005. "Trade invoicing in the accession countries: are they suited to the Euro?," Staff Reports 222, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  3. José M. Campa & Linda S. Goldberg & José M. González-Mínguez, 2005. "Exchange rate pass through to import prices in the euro area," Banco de España Working Papers 0538, Banco de España. [Downloadable!]
    Other versions:
  4. Albuquerque, Rui & de Francisco, Eva & Marques, Luis, 2006. "Marketwide Private Information in Stocks: Forecasting Currency Returns," CEPR Discussion Papers 5604, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Michele Cavallo & Cédric Tille, 2006. "Could capital gains smooth a current account rebalancing?," Working Paper Series 2006-03, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  6. Robert J. Vigfusson & Nathan Sheets & Joseph Gagnon, 2007. "Exchange rate pass-through to export prices: assessing some cross-country evidence," International Finance Discussion Papers 902, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Novy, Dennis, 2006. "Hedge Your Costs: Exchange Rate Risk and Endogenous Currency Invoicing," The Warwick Economics Research Paper Series (TWERPS) 765, University of Warwick, Department of Economics. [Downloadable!]
  8. Evi Pappa & Zheng Liu, 2005. "Gains from International Monetary Policy Coordination: Does It Pay to Be Different?," Computing in Economics and Finance 2005 457, Society for Computational Economics. [Downloadable!]
    Other versions:
  9. Michael B. Devereux & Shouyong Shi, 2008. "Vehicle currency," Globalization and Monetary Policy Institute Working Paper 10, Federal Reserve Bank of Dallas. [Downloadable!]
    Other versions:
    • Michael B. Devereux & Shouyong Shi, 2008. "Vehicle Currency," Working Papers tecipa-315, University of Toronto, Department of Economics. [Downloadable!]
  10. Ida Wolden Bache, 2006. "Assessing the structural VAR approach to exchange rate pass-through," Computing in Economics and Finance 2006 309, Society for Computational Economics. [Downloadable!]
  11. Michele Cavallo & Cédric Tille, 2006. "Current account adjustment with high financial integration: a scenario analysis," Economic Review, Federal Reserve Bank of San Francisco, pages 31-45. [Downloadable!]
  12. Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-market, trade costs, and international relative prices," Staff Report 404, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  13. Shin-ichi Fukuda & Masanori Ono, 2006. "On the Determinants of Exporters' Currency Pricing: History vs. Expectations," NBER Working Papers 12432, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Flandreau, Marc & Jobst, Clemens, 2006. "The Empirics of International Currencies: Historical Evidence," CEPR Discussion Papers 5529, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  15. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2007. "Currency Choice and Exchange Rate Pass-through," NBER Working Papers 13432, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. 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. [Downloadable!] (restricted)
    Other versions:
  17. Giancarlo Corsetti, 2007. "New Open Economy Macroeconomics," RSCAS Working Papers 2007/27, European University Institute. [Downloadable!]
  18. 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. [Downloadable!]
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