Dollar invoicing, global value chains, and the business cycle dynamics of international trade

Davied Cook and Nikhil Patel

No 860, BIS Working Papers from Bank for International Settlements

Abstract: Recent literature has highlighted that international trade is mostly priced in a few key vehicle currencies, and is increasingly dominated by intermediate goods and global value chains (GVCs). Taking these features into account, this paper reexamines the business cycle dynamics of international trade and its relationship with monetary policy and exchange rates. Using a three country dynamic stochastic general equilibrium (DSGE) framework, it finds key differences between the response of final goods and GVC trade to both internal and external shocks. In particular, the model shows that in response to a dollar appreciation triggered by a US interest rate increase, direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand. We use granular data on GVC at the sector level to document empirical evidence in favor of this prediction.

Keywords: dollar invoicing; exchange rates; monetary policy; global value chains (search for similar items in EconPapers)
JEL-codes: E2 E5 E6 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2020-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-int, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:860

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