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Ms. Emine Boz, Camila Casas, Georgios Georgiadis, Ms. Gita Gopinath, Helena Le Mezo, Arnaud Mehl, and Miss Tra Nguyen
This paper presents the most comprehensive and up-to-date panel data set of invoicing currencies in global trade. It provides data on the shares of exports and imports invoiced in US dollars, euros, and other currencies for more than 100 countries since 1990. The evidence from these data confirms findings from earlier research regarding the globally dominant role of the US dollar in invoicing – despite the comparatively smaller role of the US in global trade – and the overall stability of invoicing currency patterns. The evidence also points to several novel facts. First, both the US dollar and the euro have been increasingly used for invoicing even as the share of global trade accounted for by the US and the euro area has declined. Second, the euro is used as a vehicle currency in parts of Africa, and some European countries have seen significant shifts toward euro invoicing. Third, as suggested by the dominant currency paradigm, countries invoicing more in US dollars (euros) tend to experience greater US dollar (euro) exchange rate pass-through to their import prices; also, their trade volumes are more sensitive to fluctuations in these exchange rates.
Ms. Emine Boz, Camila Casas, Georgios Georgiadis, Ms. Gita Gopinath, Helena Le Mezo, Arnaud Mehl, and Miss Tra Nguyen

effects. Standard errors clustered by dyad. p-values in parentheses. *** p<0.01, ** p<0.05, *p<0.1. We next try to gauge whether the propensity to invoice imports in US dollars drives the importance of the dollar exchange rate. Columns (3) and (6) in Table 1 report estimates for Equation (3) when the bilateral and dollar exchange rate terms are interacted with the importer’s share of imports invoiced in dollars. As anticipated, the dollar invoicing share plays a big role in the pass-through of exchange rate fluctuations to prices: a higher dollar invoicing

Ms. Emine Boz, Ms. Gita Gopinath, and Mikkel Plagborg-Møller
We document that the U.S. dollar exchange rate drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1 percent U.S. dollar appreciation against all other currencies in the world predicts a 0.6–0.8 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country’s share of imports invoiced in dollars explains 15 percent of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.
International Monetary Fund. Monetary and Capital Markets Department

Abstract

There is an ongoing debate about the role of exchange rates in facilitating external adjustment. This chapter explores how certain aspects of international trade, namely dominant currency pricing and international integration through global value chains, shape the working of exchange rates to induce external adjustment. The analysis suggests that the widespread use of the US dollar in trade pricing alters the short-term response of trade flows to exchange rate movements, with export volumes responding timidly to an exchange rate depreciation, while most of the adjustment takes place through import volumes. A more balanced adjustment process, through both export and import volumes, reemerges over the medium term. Meanwhile, greater integration into global value chains reduces the exchange rate elasticity of gross trade volumes, both in the short and medium term, but the associated increase in gross trade flows largely offsets this effect in most cases. Overall, the results suggest that while these features of international trade affect the composition and timing of the external adjustment process, for most countries, there remain benefits of exchange rate flexibility, especially in the medium term. With more muted effects of exchange rates on trade flows in the short term, complementary policies may be needed in some cases to support exchange rate flexibility and facilitate external rebalancing.

Gustavo Adler, Camila Casas, Mr. Luis M. Cubeddu, Ms. Gita Gopinath, Ms. Nan Li, Sergii Meleshchuk, Ms. Carolina Osorio Buitron, Mr. Damien Puy, and Mr. Yannick Timmer

Invoicing—Baseline Specification A1.2. Currency of Invoicing—Unweighted Regression A1.3. Currency of Invoicing—Direct Evidence A3.1. Baseline (unweighted) A3.2. Weighted Regressions A3.3. Estimates by USD invoicing share References 1 This note benefited from invaluable feedback and input from Adolfo Barajas, Tam Bayoumi, Emine Boz, Federico Diez, Sebnem Kalemli-Ozcan, Francois de Soyres, Antonio Spilimbergo, Leonardo Villar, and various participants at the 2019 IMF Workshop on “Tariffs, Currencies and External Rebalancing” (Washington, DC). Our

Ms. Emine Boz, Ms. Gita Gopinath, and Mikkel Plagborg-Møller

the cross-dyad heterogeneity in pass-through coefficients is well explained by the propensity to invoice imports in dollars. We use the importer’s country-level dollar invoicing share from Gopinath (2015) as a proxy for the invoicing share of bilateral imports. 1 Standard panel regressions with interactions show that increasing the dollar invoicing share by 10 percentage points causes the contemporaneous dollar price pass-through to increase by 2.0−3.5 percentage points. Using a flexible hierarchical Bayesian framework to directly model pass-through heterogeneity

Alina Iancu, Gareth Anderson, Mr. Sakai Ando, Ethan Boswell, Mr. Andrea Gamba, Shushanik Hakobyan, Ms. Lusine Lusinyan, Mr. Neil Meads, and Mr. Yiqun Wu

3. Alternative Measures of Global Reach: Geopolitics Annex Table 4. Econometric Specifications Annex Table 5. Alternative Region and Time Periods Annex Table 6. Alternative Measures: Imports and Invoicing Share, De Jure Peg, Total Level of Reserves Annex Table 7. Alternative Geopolitical Measures Annex Table 8. List of Economies Figures Figure 1. Currency Composition of Reserves, Foreign Exchange Turnover, Financial Claims, and Trade Invoicing, 2019 or Most Recent Figure 2. Currency Composition of Allocated Reserves, 1947–2019 Figure 3

Gustavo Adler, Camila Casas, Mr. Luis M. Cubeddu, Ms. Gita Gopinath, Ms. Nan Li, Sergii Meleshchuk, Ms. Carolina Osorio Buitron, Mr. Damien Puy, and Mr. Yannick Timmer
The extensive use of the US dollar when firms set prices for international trade (dubbed dominant currency pricing) and in their funding (dominant currency financing) has come to the forefront of policy debate, raising questions about how exchange rates work and the benefits of exchange rate flexibility. This Staff Discussion Note documents these features of international trade and finance and explores their implications for how exchange rates can help external rebalancing and buffer macroeconomic shocks.
Gustavo Adler, Camila Casas, Mr. Luis M. Cubeddu, Ms. Gita Gopinath, Ms. Nan Li, Sergii Meleshchuk, Ms. Carolina Osorio Buitron, Mr. Damien Puy, and Mr. Yannick Timmer

dollars, whereas the stand-alone green coefficients capture the overall effect of a depreciation in such an economy. Table A1.3. Currency of Invoicing—Direct Evidence (Weighted regression) Dependent variable: PX PM QX QM TB/Y 5/ (1) (2) (3) (4) (5) Short-run elasticty Bilateral ER (exporter) 1/ 0.3009*** (0.0360) 0.2441*** (0.0520) USD ER (exporter) 2/ 0.2171*** (0.0470) -0.1276** (0.0543) Bilateral ER (exporter)*USD invoice share (99 pctile