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Dominant currencies How firms choose currency invoicing and why it matters

Author

Listed:
  • Mary Amiti

    (Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045)

  • Oleg Itskhoki

    (Princeton University, Department of Economics, Princeton, NJ 08544)

  • Jozef Konings

    (University of Liverpool Management School, Chatham St, Liverpool L69 7ZH, UK and Katholieke Universiteit Leuven, Department of Economics, Naamsestraat 69, 3000 Leuven, Belgium)

Abstract

Large movements in exchange rates have small effects on the prices of internationally traded goods. UsinganewdatasetoncurrencyinvoicingofBelgianfirms,westudyhowthecurrencyof invoicinginteractswithfirmcharacteristicsinshapingtheextentofexchangeratepass-throughat differenttimehorizons. TheUSdollarandtheEuroarethedominantcurrenciesinbothBelgium’s exportsandimports,withsubstantialvariationincurrencychoiceacrossfirmsandproductseven withinnarrowlydefinedmanufacturingindustries.Wefindthatsmaller,nonimport-intensivefirms tendtodenominatetheirexportsineuros(producercurrencypricing)andexhibitnearlycomplete exchange-ratepass-throughintodestinationcurrencypricesatallhorizons. Incontrast,thelargest most import-intensive firms, and in particular with imports denominated in US dollars, tend to alsodenominatetheirexportsinUSdollars(dominantcurrencypricing)andexhibitverylowpassthroughintheshortrun,whichgraduallyincreasesto40–50%pass-throughattheannualhorizon. Weshow thatthese empiricalpatterns arein linewith thepredictions ofa theoreticalframework featuringheterogeneousfirmswithvariablemarkups,endogenousinternationalinputsourcingand staggeredpricesettingwithendogenouscurrencychoice. Weplantouseavariantofasuchmodel, disciplined with the Belgian firm-level data, for counterfactual analysis of the gradual increase in theuseoftheeuroininternationaltradeflows.

Suggested Citation

  • Mary Amiti & Oleg Itskhoki & Jozef Konings, 2018. "Dominant currencies How firms choose currency invoicing and why it matters," Working Paper Research 353, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:201810-353
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    References listed on IDEAS

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    Keywords

    inflation forecastsmonthly consumer and producer surveysqualitative survey informationmodel-consistent expectationsJDemetra+ SSF library;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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