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 and organized-exchange traded goods. 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number
11127.
Length: Date of creation: Feb 2005 Date of revision: Handle: RePEc:nbr:nberwo:11127
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Find related papers by JEL classification: F3 - International Economics - - International Finance F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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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.:
Charles Engel & Kenneth D. West, 2003.
"Exchange rates and fundamentals,"
Proceedings,
Federal Reserve Bank of San Francisco, issue Mar.
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Shabtai Donnenfeld & Alfred A. Haug, 2001.
"Currency Invoicing of U.S. Imports,"
Working Papers
2002_11, York University, Department of Economics, revised Apr 2002.
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