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Global Trade and the Dollar

Author

Listed:
  • Mikkel Plagborg-Moller

    (Harvard University)

  • Gita Gopinath

    (Harvard)

  • Emine Boz

    (International Monetary Fund)

Abstract

We document the outsize role played by the U.S. dollar in driving international trade prices and flows. Our analysis is the first to examine the consequences of the dollar's prominence as an invoicing currency using a globally representative panel data set. We establish three facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. 2) The cross-sectional heterogeneity in pass-through/elasticity across country pairs is related to the share of imports invoiced in dollars. 3) Bilateral terms of trade are essentially uncorrelated with bilateral exchange rates. 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 results imply that the majority of international trade is best characterized by a dominant currency paradigm, as opposed to the traditional producer or local currency pricing paradigms.

Suggested Citation

  • Mikkel Plagborg-Moller & Gita Gopinath & Emine Boz, 2017. "Global Trade and the Dollar," 2017 Meeting Papers 1041, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1041
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    Cited by:

    1. Matthieu Bussière & Guillaume Gaulier & Walter Steingress, 2020. "Global Trade Flows: Revisiting the Exchange Rate Elasticities," Open Economies Review, Springer, vol. 31(1), pages 25-78, February.
    2. Ozge Akinci & Albert Queraltó, 2018. "Exchange rate dynamics and monetary spillovers with imperfect financial markets," Staff Reports 849, Federal Reserve Bank of New York.
    3. Torsten Ehlers & Mathias Hoffmann & Alexander Raabe, 2020. "Non-US global banks and dollar (co-)dependence: how housing markets became internationally synchronized," BIS Working Papers 897, Bank for International Settlements.
    4. Habib, Maurizio Michael & Stracca, Livio & Venditti, Fabrizio, 2020. "The fundamentals of safe assets," Journal of International Money and Finance, Elsevier, vol. 102(C).
    5. Chen, Natalie & Chung, Wanyu & Novy, Dennis, 2018. "Vehicle Currency Pricing and Exchange Rate Pass-Through," CEPR Discussion Papers 13085, C.E.P.R. Discussion Papers.
    6. Mayer, Thierry & Steingress, Walter, 2020. "Estimating the effect of exchange rate changes on total exports," Journal of International Money and Finance, Elsevier, vol. 106(C).
    7. Georgios Georgiadis & Saskia Mösle, 2020. "Introducing dominant‐currency pricing in the ECB's global macroeconomic model," International Finance, Wiley Blackwell, vol. 23(2), pages 234-256, August.
    8. Aleksei Kiselev & Aleksandra Zhivaykina, 2019. "The role of global relative price changes in international comovement of inflation," Bank of Russia Working Paper Series wps53, Bank of Russia.
    9. Jacob, Punnoose & Uusküla, Lenno, 2019. "Deep habits and exchange rate pass-through," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 67-89.
    10. David Cook & Nikhil Patel, 2018. "Dollar invoicing, exchange rates and international trade," BIS Papers chapters, in: Bank for International Settlements (ed.), The price, real and financial effects of exchange rates, volume 96, pages 108-121, Bank for International Settlements.
    11. Antoine Berthou & Emannuel Dhyne, 2018. "Exchange rate movements,firm-level exports and heterogeneity," Working Paper Research 334, National Bank of Belgium.
    12. Zhe Chen & Junjie Hong & Xiaonan Sun, 2020. "Exchange rate risk and trade mode choice in processing trade: Evidence from Chinese data," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 537-564, May.
    13. Aleksandra Babii, 2019. "Exchange Rates Co-movement and International Trade," 2019 Meeting Papers 1150, Society for Economic Dynamics.
    14. Gern, Klaus-Jürgen & Hauber, Philipp & Kooths, Stefan & Stolzenburg, Ulrich, 2018. "Weltkonjunktur im Frühjahr 2018 - Weltwirtschaftliche Dynamik überschreitet ihren Höhepunkt [World economic momentum peaks]," Kieler Konjunkturberichte 39, Kiel Institute for the World Economy (IfW).
    15. Mijakovic, Andrej & Rubaszek, Michał & Ca' Zorzi, Michele & Cap, Adam, 2020. "The predictive power of equilibrium exchange rate models," Working Paper Series 2358, European Central Bank.

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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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