Global Trade and the Dollar

67 Pages Posted: 1 Feb 2018

See all articles by Gita Gopinath

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 percent U.S. dollar appreciation against all other currencies in the world predicts a 0.6-0.8 percent 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 percent 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.

Keywords: US dollar, Exchange rate pass-through, International trade, Foreign exchange, Monetary policy, Cross country analysis, Bayesian semiparametrics, dominant currency, exchange rate passthrough, hierarchical Bayes, panel data, trade elasticity, US dollar, exchange rate pass-through, Bayesian Analysis, Models with Panel Data, Country and Industry Studies of Trade

JEL Classification: C11, C33, F14, F31

Suggested Citation

Gopinath, Gita and Plagborg-Møller, Mikkel, Global Trade and the Dollar (November 2017). IMF Working Paper No. 17/239. Available at SSRN: https://ssrn.com/abstract=3116197

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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