The Network Drivers of Trade Currency Invoicing
78 Pages Posted: 1 Oct 2024
Date Written: August 28, 2024
Abstract
Using an equilibrium network model and a large international panel of cross-border trade, we analyse empirically the drivers of foreign currency invoicing. First, we find strong evidence of strategic complementarity in currency invoicing across countries: Exporting countries tend to invoice more in a given currency when their main trade partners invoice in that same currency. This in turn leads to an amplification of domestic shocks through the trade network. Second, key players for a given currency are not only countries that invoice most of their exports in that foreign currency (e.g., China, South Korea, and Russia), but also countries that are central in the international trade network (e.g., Japan, Germany, and Canada). Third, at the country-level, we find evidence of strategic complementarity, or natural hedging, between the choices of export and import currencies. Fourth, in counterfactual analysis we find that, due to the large network externalities that we identify, the position of the USD as dominant trade currency is inherently fragile with respect to the currency invoicing choices of EU and BRICS countries.
Keywords: Cross-border payments, Network, Peer effect, Trade invoicing, Dominant currency
JEL Classification: F14, F31, F2, F4, G15
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