Global Trade and the Dollar

IMF Working Papers, November 13, 2017

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Global Trade and the Dollar

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Bibliographic details

• Authors: Emine Boz, Gita Gopinath, Mikkel Plagborg-Møller
• Published: November 13, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484327975.001

Summary and Key Findings

• 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, the paper establishes 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) The importing country’s share of imports invoiced in dollars explains 15 percent of the variance of dollar pass-through/elasticity across country pairs (estimated using a novel Bayesian semiparametric hierarchical panel data model).
• The findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.

Data and Methods

• Data: Newly constructed bilateral price and volume indices for more than 2,500 country pairs.
• Econometric approach: A novel Bayesian semiparametric hierarchical panel data model is used to estimate cross-pair heterogeneity and the role of invoicing shares in explaining variation in pass-through and trade elasticities.
• Key empirical focus: Dollar exchange rate versus bilateral exchange rates in explaining price pass-through, trade elasticities, and terms-of-trade correlations.

Quantitative Results and Statistics

• Sample coverage: more than 2,500 country pairs.
• Pass-through heterogeneity: importing country’s dollar invoicing share explains 15 percent of the variance of dollar pass-through/elasticity across country pairs.
• Aggregate trade elasticity: A 1 percent U.S. dollar appreciation predicts a 0.6–0.8 percent decline within a year in the volume of total trade among rest-of-world countries (conditional on the global business cycle).

Implications and Interpretation

• Dominant currency pricing: Empirical evidence supports the dominant currency paradigm—where the U.S. dollar drives pricing and trade responses—over traditional Mundell-Fleming pricing assumptions that emphasize bilateral exchange rates.
• Policy relevance: U.S. monetary policy and dollar fluctuations have material global spillovers through import prices, trade volumes, and inflation in the rest of the world.

Source: IMF Working Paper "Global Trade and the Dollar" by Emine Boz, Gita Gopinath, and Mikkel Plagborg-Møller (November 13, 2017).

Content in this bundle

• Global Trade and the Dollar, WP/17/239, November 2017
  • Global Trade and the Dollar, WP/17/239, November 2017 (Markdown version)
  • Global Trade and the Dollar, WP/17/239, November 2017 (PDF)