Dominant Invoicing Currency and Asymmetric Monetary Effects

24 Pages Posted: 27 Dec 2017

See all articles by Zefeng Chen

Zefeng Chen

Stanford University, School of Humanities & Sciences, Department of Economics, Stanford University, Department of Economics, Students

Zhengyang Jiang

Kellogg School of Management - Department of Finance

Timothy Mok

Stanford University, Graduate School of Business, Students

Date Written: December 19, 2017

Abstract

We show how the U.S. dollar as the dominant invoicing currency in international trade causes the U.S. monetary policy to have asymmetric monetary effects. We develop a model of two countries, U.S. and Japan. Households in both countries need to hold cash in advance to purchase consumption goods: The U.S. dollar can be used to purchase both countries' goods, while the Japanese yen can only be used to purchase Japan's goods. Under these constraints, an expansionary U.S. monetary policy leads to (1) a larger U.S. trade deficit, (2) larger foreign holdings of the U.S. dollar, and (3) an appreciation of the U.S. real exchange rate. In contrast, the Japanese monetary policy has none of these real effects. Beyond asymmetric monetary effects, our novel mechanism also explains the correlation between consumption and real exchange rate, and the connection between foreign economic growth and the demand for the U.S. dollar.

Keywords: The U.S. Dollar; Cash in Advance; Monetary Policy; Exchange Rate; Trade Deficits

JEL Classification: F40

Suggested Citation

Chen, Zefeng and Jiang, Zhengyang and Mok, Timothy, Dominant Invoicing Currency and Asymmetric Monetary Effects (December 19, 2017). Available at SSRN: https://ssrn.com/abstract=3086880 or http://dx.doi.org/10.2139/ssrn.3086880

Zefeng Chen

Stanford University, School of Humanities & Sciences, Department of Economics, Stanford University, Department of Economics, Students ( email )

Stanford, CA
United States
6507722128 (Phone)
6507722128 (Fax)

Zhengyang Jiang (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://https://sites.google.com/site/jayzedwye/

Timothy Mok

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

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