American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Dominant Currency Paradigm
American Economic Review
vol. 110,
no. 3, March 2020
(pp. 677–719)
Abstract
We propose a "dominant currency paradigm" with three key features: dominant currency pricing, pricing complementarities, and imported inputs in production. We test this paradigm using a new dataset of bilateral price and volume indices for more than 2,500 country pairs that covers 91 percent of world trade, as well as detailed firm-product-country data for Colombian exports and imports. In strong support of the paradigm we find that (i) noncommodities terms-of-trade are uncorrelated with exchange rates; (ii) the dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions, and this effect is increasing in the share of imports invoiced in dollars; (iii) US import volumes are significantly less sensitive to bilateral exchange rates, compared to other countries' imports; (iv) a 1 percent US dollar appreciation against all other currencies predicts a 0.6 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. We characterize the transmission of, and spillovers from, monetary policy shocks in this environment.Citation
Gopinath, Gita, Emine Boz, Camila Casas, Federico J. Díez, Pierre-Olivier Gourinchas, and Mikkel Plagborg-Møller. 2020. "Dominant Currency Paradigm." American Economic Review 110 (3): 677–719. DOI: 10.1257/aer.20171201Additional Materials
JEL Classification
- E52 Monetary Policy
- F14 Empirical Studies of Trade
- F31 Foreign Exchange
- F44 International Business Cycles