 Trade, finance and endogenous invoicing currency: Theory and firm-level evidenceTao Liu and Dong Lu Pacific-Basin Finance Journal, 2019, vol. 56, issue C, 21-44 Abstract: Financial intermediaries facilitate a significant part of international trade. However, the impact of financial factors on the choice of invoicing currency is not well understood. This paper develops a three-country model with financial frictions to study exporters' endogenous invoicing currency choices. The model predicts that exporters that rely on bank-intermediated trade finance are more likely to price in local currency of the destination country if that country has a higher level of financial development. We test this and other theoretical predictions using a novel and highly disaggregated dataset from Colombia. We find strong support for the model's predictions. Exporters prefer the currency of a country with a more developed financial market, especially small exporters in financially vulnerable sectors. In addition, excessive exchange rate volatility will increase the chance of using a vehicle or third-party currency. Our results have important implications for emerging market economies, highlighting the effects of financial policies on invoicing currency patterns. Keywords: Currency invoicing; Trade finance; Financial development; Exchange rate risk; Hedging (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:56:y:2019:i:c:p:21-44 DOI: 10.1016/j.pacfin.2019.05.007 Access Statistics for this article Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee More articles in Pacific-Basin Finance Journal from Elsevier |
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