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The Causal Effect of the Dollar on Trade

Author

Listed:
  • Sai Ma
  • Tim Schmidt-Eisenlohr
  • Shaojun Zhang

Abstract

This paper establishes a causal link between the dollar exchange rate and international trade flows, employing a new instrument for the U.S. Dollar that is based on domestic U.S. housing activity (Ma and Zhang (2019)). In line with the dominant currency paradigm (Gopinath et al. (2020)), import prices and quantities respond strongly to a country’s exchange rate with the U.S. dollar. Once we instrument the dollar, we find evidence for perfect pass-through of the dollar exchange rate to import prices. A dollar appreciation of 1 percent lowers import quantities by 1.5 percent for countries that fully invoice in dollars.

Suggested Citation

  • Sai Ma & Tim Schmidt-Eisenlohr & Shaojun Zhang, 2020. "The Causal Effect of the Dollar on Trade," CESifo Working Paper Series 8727, CESifo.
  • Handle: RePEc:ces:ceswps:_8727
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    References listed on IDEAS

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    1. Caroline M. Betts & Timothy J. Kehoe, 2008. "Real exchange rate movements and the relative price of non-traded goods," Staff Report 415, Federal Reserve Bank of Minneapolis.
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    More about this item

    Keywords

    dominant currency; dollar invoicing; international trade;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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