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The internationalization of the dollar and trade balance adjustment

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  • Linda Goldberg
  • Cedric Tille

Abstract

The pattern of international trade adjustment is affected by the continuing international role of the dollar and related evidence on exchange rate pass-through to prices. This paper argues that a depreciation of the dollar would have asymmetric effects on flows between the United States and its trading partners. With low exchange rate pass-through to U.S. import prices and high exchange rate pass-through to the local prices of countries consuming U.S. exports, the effect of dollar depreciation on real trade flows is dominated by an adjustment in U.S. export quantities, which increase as U.S. goods become cheaper in the rest of the world. Real U.S. imports are affected less because U.S. prices are more insulated from exchange rate movements-pass-through is low and dollar invoicing is high. In relation to prices, the effects on the U.S. terms of trade are limited: U.S. exporters earn the same amount of dollars for each unit shipped abroad, and U.S. consumers do not encounter more expensive imports. Movements in dollar exchange rates also affect the international trade transactions of countries invoicing some of their trade in dollars, even when these countries are not transacting directly with the United States.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 255.

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Date of creation: 2006
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Handle: RePEc:fip:fednsr:255

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Keywords: Foreign exchange rates ; Dollar; American ; Exports ; Imports - Prices ; International trade;

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References

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Citations

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Cited by:
  1. Michael B. Devereux & Hans Genberg, 2006. "Currency Appreciation and Current Account Adjustment," Working Papers 172006, Hong Kong Institute for Monetary Research.
  2. Holinski Nils & Kool Clemens & Muysken Joan, 2009. "International Portfolio Balance – Modeling the External Adjustment Process," Research Memorandum 033, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. Holinski Nils & Vermeulen Robert, 2009. "The International Wealth Effect: A Global Error-Correcting Analysis," Research Memorandum 019, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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