Dominant Currency Pricing in International Trade of Services

43 Pages Posted: 26 Apr 2024

See all articles by João Amador

João Amador

Bank of Portugal; Nova School of Business and Economics

Arnaud Mehl

European Central Bank (ECB)

Martin Schmitz

European Central Bank (ECB)

Joana Garcia

Bank of Portugal; University of Minho

Date Written: April, 2024

Abstract

We analyze, for the first time, how firms choose the currency in which they price transactions in international trade of services and investigate, using direct evidence, whether the US dollar (USD) plays a dominant role in services trade. Drawing on a new granular dataset on extra-European Union exports of Portuguese firms broken down by currency, we show that currency choices in services trade are active firm-level decisions. Firms that are larger and rely more on inputs priced in foreign currencies are less likely to use the domestic currency to export services. Importantly, we show that the USD has a dominant role as a vehicle currency in trade of services – but to a lesser extent than in trade of goods – and that this is not just due to differences in the geography of trade. An external validity test based on macro data available for Portugal and six other European countries confirms this finding. In line with predictions from recent theoretical models, our results are consistent with the lower prevalence of USD in services trade arising from a lower openness of services markets and a stronger reliance of services on domestic inputs.

Keywords: dominant currency paradigm, international trade, services

JEL Classification: F14, F31, F41

Suggested Citation

Amador, João and Mehl, Arnaud and Schmitz, Martin and Garcia, Joana, Dominant Currency Pricing in International Trade of Services (April, 2024). ECB Working Paper No. 2024/2932, Available at SSRN: https://ssrn.com/abstract=4805535 or http://dx.doi.org/10.2139/ssrn.4805535

João Amador (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Arnaud Mehl

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Martin Schmitz

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Joana Garcia

Bank of Portugal ( email )

University of Minho

Braga, 4700
Portugal

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