Dominant Currency Paradigm

By Gita Gopinath, Emine Boz, C. Casas, Federico J. Díez, P. Gourinchas, Mikkel Plagborg-Møller. The American Economic Review, 2020

458 citations recorded by the source corpus.

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. (JEL E52, F14, F31, F44)

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/66b41e5eb089b118ee70ea472f0821756f645a2f

Citations in the corpus

• Exchange Rate Disconnect in General Equilibrium (2017, unknown): “In fact, both of these patterns are at odds with the data, where the correlation between TOTand RER is weak, even if slightly positive (Gopinath et al. 2020).”