Currency Quandary: The Choice of Invoicing Currency under Exchange-Rate Uncertainty

Martin Johnson and Daniel Pick

Review of International Economics, 1997, vol. 5, issue 1, 118-28

Abstract: Recent studies have derived optimal invoicing strategies for an exporting firm when exchange rates are uncertain. However, these studies fail to explain trade transacted in a third currency (vehicle currency). In this study, we extend existing models to include the possibility that trade occurs in a vehicle currency. We find that under conditions stipulated by existing models, vehicle-currency invoicing is not preferred. The presence of a competing exporter under imperfect competition, however, can induce vehicle-currency pricing. This is consistent with trade in many primary commodities dominated by few exporters with many importers but where commodities are not perfectly homogeneous. Copyright 1997 by Blackwell Publishing Ltd.

Date: 1997
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