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Dollar invoicing, global value chains, and the business cycle dynamics of international trade

Author

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  • David Cook
  • Nikhil Patel

Abstract

Recent literature has highlighted that international trade is mostly priced in a few key vehicle currencies, and is increasingly dominated by intermediate goods and global value chains (GVCs). Taking these features into account, this paper reexamines the business cycle dynamics of international trade and its relationship with monetary policy and exchange rates. Using a three country dynamic stochastic general equilibrium (DSGE) framework, it finds key differences between the response of final goods and GVC trade to both internal and external shocks. In particular, the model shows that in response to a dollar appreciation triggered by a US interest rate increase, direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand. We use granular data on GVC at the sector level to document empirical evidence in favor of this prediction.

Suggested Citation

  • David Cook & Nikhil Patel, 2020. "Dollar invoicing, global value chains, and the business cycle dynamics of international trade," BIS Working Papers 860, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:860
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Dollar invoicing, global value chains, and the business cycle dynamics of international trade
      by Christian Zimmermann in NEP-DGE blog on 2020-05-06 15:16:11

    More about this item

    Keywords

    dollar invoicing; exchange rates; monetary policy; global value chains;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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