Global Trade and the Dollar

66 Pages Posted: 6 Nov 2017

See all articles by Emine Boz

Emine Boz

International Monetary Fund (IMF)

Gita Gopinath

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Mikkel Plagborg-Møller

Harvard University - Department of Economics

Date Written: November 2017

Abstract

We document that the U.S. dollar exchange rate 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 strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1% U.S. dollar appreciation against all other currencies in the world predicts a 0.6--0.8% decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country's share of imports invoiced in dollars explains 15% of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.

Suggested Citation

Boz, Emine and Gopinath, Gita and Plagborg-Møller, Mikkel, Global Trade and the Dollar (November 2017). NBER Working Paper No. w23988. Available at SSRN: https://ssrn.com/abstract=3065800

Emine Boz (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Gita Gopinath

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mikkel Plagborg-Møller

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

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