Introducing Dominant Currency Pricing in the ECB's Global Macroeconomic Model

32 Pages Posted: 4 Oct 2019

See all articles by Georgios Georgiadis

Georgios Georgiadis

European Central Bank (ECB)

Saskia Mösle

Kiel Institute for the World Economy

Date Written: October, 2019

Abstract

A large share of global trade being priced and invoiced primarily in US dollar rather than the exporter’s or the importer’s currency has important implications for the transmission of shocks. We introduce this “dominant currency pricing” (DCP) into ECB-Global, the ECB’s macroeconomic model for the global economy. To our knowledge, this is the first attempt to incorporate DCP into a major global macroeconomic model used at central banks or international organisations. In ECB-Global, DCP affects in particular the role of expenditure-switching and the US dollar exchange rate for spillovers: In case of a shock in a non-US economy that alters the value of its currency multilaterally, expenditure-switching occurs only through imports; in case of a US shock that alters the value of the US dollar multilaterally, expenditure-switching occurs both in non-US economies’ imports and – as these are imports of their trading partners – exports. Overall, under DCP the US dollar exchange rate is a major driver of global trade, even for transactions that do not involve the US. In order to illustrate the usefulness of ECB-Global and DCP for policy analysis, we explore the implications of the euro rivaling the US dollar as a second dominant currency in global trade. According to ECB-Global, in such a scenario the global spillovers from US shocks are smaller, while those from euro area shocks are amplified; domestic euro area monetary policy effectiveness is hardly affected by the euro becoming a second globally dominant currency in trade.

Keywords: dominant currency paradigm, global macroeconomic modelling, spillovers

JEL Classification: F42, E52, C50

Suggested Citation

Georgiadis, Georgios and Mösle, Saskia, Introducing Dominant Currency Pricing in the ECB's Global Macroeconomic Model (October, 2019). ECB Working Paper No. 2321, Available at SSRN: https://ssrn.com/abstract=3464246

Georgios Georgiadis (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Saskia Mösle

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

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