Dollar Invoicing, Global Value Chains, and the Business Cycle Dynamics of International Trade
61 Pages Posted: 8 May 2020
Date Written: April 28, 2020
Recent literature has highlighted that international trade is mostly priced in a few key vehicle currencies, and is increasingly dominated by intermediate goods and global value chains (GVCs). Taking these features into account, this paper reexamines the business cycle dynamics of international trade and its relationship with monetary policy and exchange rates. Using a three country dynamic stochastic general equilibrium (DSGE) framework, it finds key differences between the response of final goods and GVC trade to both internal and external shocks. In particular, the model shows that in response to a dollar appreciation triggered by a US interest rate increase, direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand. We use granular data on GVC at the sector level to document empirical evidence in favor of this prediction.
Keywords: dollar invoicing, exchange rates, monetary policy, global value chains
JEL Classification: E2, E5, E6
Suggested Citation: Suggested Citation