Has the Euro Affected the Choice of Invoicing Currency?
Jenny E. Ligthart
Tilburg University - CentER, Department of Economics; University of Groningen - Faculty of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)
Sebastian E. V. Werner
Catholic University of Louvain (UCL)
May 12, 2010
CentER Discussion Paper Series No. 2010-48
We present a new approach to study empirically the effect of the introduction of the euro on currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice depends on the characteristics of both the currency and the country. We use unique quarterly panel data of Norwegian imports from OECD countries for the 1996-2006 period. One of the key findings is that the eurozone countries in trade with Norway have substantially increased their share of home currency invoicing after the introduction of the euro. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The econometric analysis shows a significant effect of euro introduction above and beyond the determinants of currency invoicing (i.e., inflation rate, inflation volatility, foreign exchange market size, and product composition). However, the rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility.
Number of Pages in PDF File: 51
Keywords: euro, invoicing currency, exchange rate risk, inflation, inflation risk, vehicle currencies, compositional multinomial logit
JEL Classification: F14, F15, F31, F33, F36, E31, C25
Date posted: May 17, 2010