Vehicle Currency Use in International Trade

42 Pages Posted: 1 Feb 2005

See all articles by Linda S. Goldberg

Linda S. Goldberg

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Cédric Tille

Graduate Institute of International and Development Studies (HEI)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

Although currency invoicing in international trade transactions is central to the transmission of monetary policy, the forces motivating the choice of currency have long been debated. We introduce a model wherein agents involved in international trade can invoice in the exporter's currency, the importer's currency, or a third-country vehicle currency. The model is designed to contrast the contribution of macroeconomic variability with that of industry-specific features in the selection of an invoice currency. We show that producers in industries with high demand elasticities are more likely than producers in other industries to display herding in their choice of currency. This industry-related force is more influential than local macroeconomic performance in determining producers' choices.

Drawing on data on invoice currency use in exports and imports for twenty-four countries, we document that the dollar is the currency of choice for most transactions involving the United States. The dollar is also extensively used as a vehicle currency in international trade flows that do not directly involve the United States. Consistent with the results of our model, this last finding is largely attributable to international trade in reference-priced goods and goods traded on organized exchanges. Although the magnitude of business cycle volatility matters for invoicing of more differentiated products, it is less central for invoicing nondifferentiated goods.

Keywords: invoicing, vehicle currency, pass-through, exchange rate, producer currency pricing, local currency pricing

JEL Classification: F3, F4

Suggested Citation

Goldberg, Linda S. and Tille, Cedric, Vehicle Currency Use in International Trade (January 2005). FRB of New York Staff Report No. 200. Available at SSRN: https://ssrn.com/abstract=658163 or http://dx.doi.org/10.2139/ssrn.658163

Linda S. Goldberg (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-2836 (Phone)
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National Bureau of Economic Research (NBER)

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Cedric Tille

Graduate Institute of International and Development Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

HOME PAGE: http://sites.google.com/site/cedrictilleheid/home

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