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The Choice of Invoice Currency under Uncertainty: Theory and Evidence from Korea

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  • Shin-ichi Fukuda

    (Faculty of Economics, The University of Tokyo)

  • Masanori Ono

    (Faculty of Economics, Fukushima University)

Abstract

The purpose of this paper is to investigate the choice of invoice currency under exchange rate uncertainty. The analysis is motivated by the fact that the U.S. dollar has been the dominant vehicle currency in developing countries. The theoretical analysis is based on an open economy model of monopolistic competition. The export prices are set before exchange rates are known. When the market is competitive enough, the exporting firms tend to set their prices not to deviate from those of the competitors. As a result, when the other exporters set their prices in the third currency, the exporting firm tends to choose the third currency as an equilibrium invoice currency. The tendency becomes conspicuous in the market where the shares of local firms are small. The latter part of the paper empirically investigates the relevancy of the theoretical results by using the export price data in Korea. We find that export prices in Korea are highly stable in terms of the US dollar even in the commodities for which Japan has had dominant shares. We also find that export prices in Korea are more stable against the US dollar in the commodities for which the shares of local firms are small in Japan. The empirical results are consistent with our theoretical model. The result may explain why the firm tends to set prices in the US dollar even if the United States is not a trade partner.

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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-271.

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Length: 30 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:tky:fseres:2004cf271

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  1. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
  2. Kiminori Matsuyama, 1991. "Toward a Theory of International Currency," Discussion Papers 931, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Magee, Stephen P & Rao, Ramesh K S, 1980. "Vehicle and Nonvehicle Currencies in International Trade," American Economic Review, American Economic Association, vol. 70(2), pages 368-73, May.
  4. McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098.
  5. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  6. 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.
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Cited by:
  1. Kamps, Annette, 2006. "The euro as invoicing currency in international trade," Working Paper Series 0665, European Central Bank.
  2. ITO Takatoshi & KOIBUCHI Satoshi & SATO Kiyotaka & SHIMIZU Junko, 2013. "Choice of Invoicing Currency: New evidence from a questionnaire survey of Japanese export firms," Discussion papers 13034, Research Institute of Economy, Trade and Industry (RIETI).

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