The Causal Effect of the Dollar on Trade
29 Pages Posted: 25 May 2022
There are 2 versions of this paper
The Effect of the Dollar on Trade Prices
This paper establishes a causal link between the dollar exchange rate and international trade flows, employing a new instrument for the U.S. dollar that is based on domestic U.S. housing activity. In line with the dominant currency paradigm (Gopinath et al. (2020)), import prices and quantities respond strongly to a country’s exchange rate with the U.S. dollar. Once we instrument the dollar, we find evidence for perfect passthrough of the dollar exchange rate to import prices that are invoiced in dollars. A dollar appreciation of 1 percent lowers import quantities by 1.5 percent for countries that fully invoice in dollars.
Keywords: Dominant Currency, Dollar Invoicing, International Trade
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