Dominant currencies How firms choose currency invoicing and why it matters
Mary Amiti (),
Oleg Itskhoki and
Jozef Konings ()
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Jozef Konings: University of Liverpool Management School, Chatham St, Liverpool L69 7ZH, UK and Katholieke Universiteit Leuven, Department of Economics, Naamsestraat 69, 3000 Leuven, Belgium
No 353, Working Paper Research from National Bank of Belgium
Large movements in exchange rates have small eects on the prices of internationally traded goods. Using a new dataset on currency invoicing of Belgian rms, we study how the currency of invoicing interacts with rm characteristics in shaping the extent of exchange rate pass-through at dierent time horizons. The US dollar and the Euro are the dominant currencies in both Belgium’s exports and imports, with substantial variation in currency choice across rms and products even within narrowly dened manufacturing industries. We nd that smaller, nonimport-intensive rms tend to denominate their exports in euros (producer currency pricing) and exhibit nearly complete exchange-rate pass-through into destination currency prices at all horizons. In contrast, the largest most import-intensive rms, and in particular with imports denominated in US dollars, tend to also denominate their exports in US dollars (dominant currency pricing) and exhibit very low passthrough in the short run, which gradually increases to 40–50% pass-through at the annual horizon. We show that these empirical patterns are in line with the predictions of a theoretical framework featuring heterogeneous rms with variable markups, endogenous international input sourcing and staggered price setting with endogenous currency choice. We plan to use a variant of a such model, disciplined with the Belgian rm-level data, for counterfactual analysis of the gradual increase in the use of the euro in international trade flows.
Keywords: inflation; forecastsmonthly; consumer; and; producer; surveysqualitative; survey; informationmodel-consistent; expectationsJDemetra+; SSF; library (search for similar items in EconPapers)
JEL-codes: E31 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201810-353
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