Monetary Policy Spillovers Through Invoicing Currencies

Zhang, Tony

doi:10.2139/ssrn.3125145

Cited by 10 publications

(18 citation statements)

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“…2 Finally, Zhang (2018) sets up a two-period three-country general equilibrium model and shows that under DCP exchange rates of economies with larger shares of the consumption basket priced in US dollar exhibit smaller depreciations and larger interest rate rises in response to contractionary US monetary policy shocks. Zhang (2018) then provides empirical evidence using high-frequency estimates of the financial market effects of US monetary policy shocks for a set of advanced economies with developed financial markets that are consistent with the predictions of DCP. 3 We contribute to this existing literature by providing new evidence for the empirical relevance of DCP in several dimensions and by addressing some important shortcomings of existing work.…”

Section: Introductionmentioning

confidence: 84%

“…Moreover, we consider exogenous changes in the US dollar exchange rate rather than reduced-form regressions, which is more consistent with the experiments in the theoretical models from which the testable predictions of DCP are derived and which reduces the risk of omitted variable bias in the empirical analysis. Relative to Zhang (2018), we contribute to the literature by assessing the empirical relevance of DCP testing for its predictions for output spillovers from US shocks at the business cycle frequency rather than those on asset prices at the daily frequency, which does not indicate how persistent the estimated effects are at horizons relevant for macroeconomic models and policymakers. Moreover, relative to Zhang (2018) we also include in our analysis a broad range of emerging market economies instead of focusing on advanced economies with developed financial markets.…”

Section: Introductionmentioning

confidence: 99%

“…Relative to Zhang (2018), we contribute to the literature by assessing the empirical relevance of DCP testing for its predictions for output spillovers from US shocks at the business cycle frequency rather than those on asset prices at the daily frequency, which does not indicate how persistent the estimated effects are at horizons relevant for macroeconomic models and policymakers. Moreover, relative to Zhang (2018) we also include in our analysis a broad range of emerging market economies instead of focusing on advanced economies with developed financial markets. This is particularly informative for assessing the empirical relevance of DCP as US dollar invoicing of trade is much more widespread in emerging market than in advanced economies.…”

Section: Introductionmentioning

confidence: 99%

“…This is particularly informative for assessing the empirical relevance of DCP as US dollar invoicing of trade is much more widespread in emerging market than in advanced economies. Finally, both relative to Gopinath et al (2019) as well as Zhang (2018) our analysis focuses on partial rather than full DCP, which seems to be more relevant empirically given the invoicing landscape documented in Gopinath (2015). Accounting for partial rather than full DCP is also important because it implies asymmetries in expenditure switching at home and abroad that generates an additional net export and hence output spillover channel from US dollar exchange rate variation.…”

Section: Introductionmentioning

confidence: 99%

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Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation

Georgiadis

Schumann

2019

gwp

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Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy coordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing (PCP) and local-currency pricing (LCP). In the model, under DCP the output spillovers from shocks that appreciate the U.S. dollar multilaterally decline with an economy's export-import U.S. dollar pricing share differential, i.e., the difference between the share of an economy's exports and imports that are priced in the dominant currency. Underlying this prediction is a change in an economy's net exports in response to multilateral changes in the U.S. dollar exchange rate that arises because of differences in the extent to which exports and imports are priced in the dominant currency. We then confront this prediction of DCP with the data in a sample of up to 46 advanced and emerging-market economies for the time period from 1995 to 2018. Specifically, controlling for other cross-border transmission channels, we document that consistent with the prediction from DCP the output spillovers from U.S. dollar appreciation correlate negatively with recipient economies' export-import U.S. dollar invoicing share differentials. We document that these findings are robust to considering U.S. demand, U.S. monetary policy and exogenous exchange rate shocks as a trigger of U.S. dollar appreciation, as well as to accounting for the role of commodity trade in U.S. dollar invoicing.

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Section: Introductionmentioning

confidence: 84%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation

Georgiadis

Schumann

2019

gwp

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“…5 See Hooper and Kohlhagen (1978), Kenen and Rodrik (1986), and Frankel and Rose (2002). He, Krishnamurthy, and Milbradt, 2019;Gopinath and Stein, 2019) and on the transmission of monetary shocks (Boz et al, 2020;Miranda-Agrippino and Rey, 2015;Zhang, 2019).…”

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confidence: 99%

A Risk-based Theory of Exchange Rate Stabilization

Hassan¹,

Mertens²,

Zhang³

2020

ERWP

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We develop a novel, risk-based theory of the effects of exchange rate stabilization. In our model, the choice of exchange rate regime allows policymakers to make their currency, and by extension, the firms in their country, a safer investment for international investors. Policies that induce a country's currency to appreciate when the marginal utility of international investors is high lower the required rate of return on the country's currency and increase the world-market value of domestic firms. Applying this logic to exchange rate stabilizations, we find a small economy stabilizing its bilateral exchange rate relative to a larger economy can increase domestic capital accumulation, domestic wages, and even its share in world wealth. In the absence of policy coordination, small countries optimally choose to stabilize their exchange rates relative to the currency of the largest economy in the world, which endogenously emerges as the world's “anchor currency.” Larger economies instead optimally choose to oat their exchange rates. The model therefore predicts an equilibrium pattern of exchange rate arrangements that is remarkably similar to the one in the data.

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Dominant-currency pricing and the global output spillovers from US dollar appreciation

Georgiadis

Schumann

2021

Journal of International Economics

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Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy co-ordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing (PCP) and local-currency pricing (LCP). In the model, under DCP the output spillovers from shocks that appreciate the US dollar multilaterally decline with an economy's export-import US dollar pricing share differential, i.e. the difference between the share of an economy's exports and imports that are priced in the dominant currency. Underlying this prediction is a change in an economy's net exports in response to multilateral changes in the US dollar exchange rate that arises because of differences in the extent to which exports and imports are priced in the dominant currency. We then confront this prediction of DCP with the data in a sample of up to 46 advanced and emerging market economies for the time period from 1995 to 2018. Specifically, controlling for other cross-border transmission channels, we document that consistent with the prediction from DCP the output spillovers from US dollar appreciation correlate negatively with recipient economies' export-import US dollar invoicing share differentials. We document that these findings are robust to considering US demand, US monetary policy and exogenous exchange rate shocks as a trigger of US dollar appreciation, as well as to accounting for the role of commodity trade in US dollar invoicing.

show abstract

Monetary Policy Spillovers Through Invoicing Currencies

Cited by 10 publications

References 80 publications

Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation

Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation

A Risk-based Theory of Exchange Rate Stabilization

Dominant-currency pricing and the global output spillovers from US dollar appreciation

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