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Global Trade and the Dollar

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  • Emine Boz
  • Gita Gopinath
  • Mikkel Plagborg-Møller

Abstract

We document that it is not bilateral exchange rates but the dollar exchange rate that drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The cross-sectional heterogeneity in pass-through/elasticity across country pairs is related to the share of imports invoiced in dollars. Our results derive from fixed effects panel regressions as well as a Bayesian semiparametric hierarchical panel data model. Unlike standard panel regressions, the Bayesian approach allows us to quantify the cross-sectional heterogeneity of exchange rate pass-through/elasticities and the relation of this heterogeneity to dollar invoicing. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.

Suggested Citation

  • Emine Boz & Gita Gopinath & Mikkel Plagborg-Møller, 2017. "Global Trade and the Dollar," Working Paper 489661, Harvard University OpenScholar.
    • Handle: RePEc:qsh:wpaper:489661
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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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