Macroeconomic Interdependence and the International Role of the Dollar

30 Pages Posted: 11 Mar 2008

See all articles by Linda S. Goldberg

Linda S. Goldberg

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Cédric Tille

Graduate Institute of International and Development Studies (HEI)

Multiple version iconThere are 3 versions of this paper

Date Written: February 1, 2008

Abstract

The U.S. dollar plays a key role in international trade invoicing along two complementary dimensions. First, most U.S. exports and imports are invoiced in dollars; second, trade flows that do not involve the United States are often invoiced in dollars, a fact that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that although exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal monetary policy.

Keywords: exchange rate, pass-through, center-periphery, invoicing, monetary policy, interdependence

JEL Classification: F41, F42

Suggested Citation

Goldberg, Linda S. and Tille, Cedric, Macroeconomic Interdependence and the International Role of the Dollar (February 1, 2008). FRB of New York Staff Report No. 316. Available at SSRN: https://ssrn.com/abstract=1103107 or http://dx.doi.org/10.2139/ssrn.1103107

Linda S. Goldberg (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-2836 (Phone)
212-720-6831 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Cedric Tille

Graduate Institute of International and Development Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

HOME PAGE: http://sites.google.com/site/cedrictilleheid/home

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