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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. Krugman, Paul, 1980. "Vehicle Currencies and the Structure of International Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(3), pages 513-26, August.
  2. 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.
  3. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  4. 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.).
  5. 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.
  6. Rey, Hélène, 1999. "International Trade and Currency Exchange," CEPR Discussion Papers 2226, C.E.P.R. Discussion Papers.
  7. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
  8. Jeffrey A. Frankel & Shang-Jin Wei, 1992. "Yen bloc or dollar bloc: exchange rate policies of the East Asian economies," Pacific Basin Working Paper Series 93-01, Federal Reserve Bank of San Francisco.
  9. Shin-ichi Fukuda, 1996. "The Structural Determinants of Invoice Currencies in Japan: The Case of Foreign Trade with East Asian Countries," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 147-165 National Bureau of Economic Research, Inc.
  10. McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098, February.
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Cited by:
  1. 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.
  2. Ghosh, Amit & Rajan, Ramkishen S., 2009. "Exchange rate pass-through in Korea and Thailand: Trends and determinants," Japan and the World Economy, Elsevier, vol. 21(1), pages 55-70, January.
  3. Annette Kamps, 2006. "The euro as invoicing currency in international trade," Working Paper Series 665, European Central Bank.
  4. Shi, Kang & Xu, Juanyi, 2010. "Twin dollarization and exchange rate policy," Journal of International Economics, Elsevier, vol. 81(1), pages 109-121, May.

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