Global Trade and the Dollar

By Emine Boz, Gita Gopinath, Mikkel Plagborg-Møller

November 13, 2017

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Emine Boz, Gita Gopinath, and Mikkel Plagborg-Møller. Global Trade and the Dollar, (USA: International Monetary Fund, 2017) accessed November 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We document that the U.S. dollar exchange rate drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1 percent U.S. dollar appreciation against all other currencies in the world predicts a 0.6–0.8 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country’s share of imports invoiced in dollars explains 15 percent of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.

Subject: Currencies, Exchange rate adjustments, Exchange rates, Foreign exchange, Import prices, Imports, International trade, Money, Prices

Keywords: Bayesian semiparametrics, Bilateral trade, Currencies, Dollar pass-through, Dominant currency, Exchange rate, Exchange rate adjustments, Exchange rate pass-through, Exchange rates, Global, Hierarchical Bayes, Import prices, Imports, Invoicing share, Log growth, Panel data, Pass-through coefficient, Price pass-through, Software package, Trade elasticity, U.S. dollar, WP

Publication Details

Pages:

66
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/239
Stock No:

WPIEA2017239
ISBN:

9781484327975
ISSN:

1018-5941

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