Hedge Your Costs: Exchange Rate Risk and Endogenous Currency Invoicing

Dennis Novy

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: The choice of invoicing currency for trade is crucial for the international transmission of macroeconomic policy. This paper develops a three-country model that endogenizes the choice of invoicing currency and that allows for a share of firms' costs to be denominated in foreign currency, consistent with the empirical evidence on the high degree of pass-through to import prices. Invoicing decisions are driven by firms' desire to hedge costs but also by exchange rate volatility and currency comovements. The model is tested empirically with a data set that spans ten currencies and 24 reporting countries, confirming the importance of currency comovements for the decision to invoice in vehicle currency. The findings also imply that if the U.S. share of world output continues to fall, other currencies will increasingly replace the U.S. dollar as an international vehicle currency.

Keywords: Invoicing Currency; Exchange Rate Risk; Hedging (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-fmk and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Working Paper: Hedge Your Costs: Exchange Rate Risk and Endogenous Currency Invoicing (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:765

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