Hedge Your Costs: Exchange Rate Risk and Endogenous Currency Invoicing

Dennis Novy

No 269735, Economic Research Papers 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 Örmsícosts 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 Örmsídesire 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, conÖrming the importance of currency comovements for the decision to invoice in vehicle currency. The Öndings 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: Financial Economics; International Relations/Trade (search for similar items in EconPapers)
Pages: 36
Date: 2006-07-10
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Citations: View citations in EconPapers (29)

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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:ags:uwarer:269735

DOI: 10.22004/ag.econ.269735

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