Trade, Finance and Endogenous Invoicing Currency: Theory and Firm-Level Evidence

49 Pages Posted: 26 Jan 2018

See all articles by Tao Liu

Tao Liu

Central University of Finance and Economics (CUFE) - School of International Trade and Economics

Dong Lu

Renmin University of China

Date Written: January 25, 2018

Abstract

Financial market imperfections severely restrict currency usage in international trade, but formal analysis is elusive.(Gopinath, 2015) This paper develops a three-country sticky price model with financial frictions to address the endogenous invoicing currency choices in international trade. In our unified framework exporters' invoicing currency decisions are linked to financial, industrial and macroeconomics forces, with the key innovation on financial channel. Using highly disaggregated data from Colombia, we provide new firm-level evidence that financial factors significantly affect the patterns of currency usage. We show that exporters prefer the currency with a more developed financial market, especially for small firms in financially vulnerable sectors. In particular, a developing country with medium-level of financial development could enhance its currency usage by more than 10% if it further develops the financial market. Furthermore, volatile exchange rate will increase the chance of using the vehicle currency. We also confirm empirically the importance of industrial and strategic factors for invoicing currency decision, although they only have the secondary effects.

Keywords: Invoicing Currency,Trade Finance,Financial Development, Exchange Rate Risk, Hedging

JEL Classification: F10, F33, F41

Suggested Citation

Liu, Tao and Lu, Dong, Trade, Finance and Endogenous Invoicing Currency: Theory and Firm-Level Evidence (January 25, 2018). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3109396 or http://dx.doi.org/10.2139/ssrn.3109396

Tao Liu

Central University of Finance and Economics (CUFE) - School of International Trade and Economics ( email )

Beijing, 100081
China

Dong Lu (Contact Author)

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China
13522150737 (Phone)
13522150737 (Fax)

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