Dollar Invoicing, Global Value Chains, and the Business Cycle Dynamics of International Trade
IMF Working Papers, February 11, 2022
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- Dollar Invoicing, Global Value Chains, and the Business Cycle Dynamics of International Trade
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Bibliographic details
- Authors: David Cook, Nikhil Patel
- Published: February 11, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400202483.001
Summary
- Recent literature highlights that international trade is mostly priced in a few key vehicle currencies and is increasingly dominated by intermediate goods and global value chains (GVCs).
- This paper reexamines the relationship between monetary policy, exchange rates and international trade flows while explicitly accounting for dollar invoicing and the prominence of GVCs.
- Methodology: dynamic stochastic general equilibrium (DSGE) framework combined with granular sector-level GVC data to document empirical evidence.
Key model findings
- The response of final goods trade and GVC-oriented trade to domestic and foreign shocks differs importantly depending on:
- the origin and ultimate destination of value added, and
- the intermediate shipments involved.
- Example result: in response to a dollar appreciation triggered by a US interest rate increase:
- direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand, and
- exports to the US decline much more when measured in gross as opposed to value added terms.
Empirical evidence
- Uses granular data on GVCs at the sector level to document empirical evidence consistent with the model’s key predictions.
- Empirical strategy and sector-level granularity are used to validate heterogeneous trade responses depending on trade invoicing currency and value-added chains.
Subject classification and keywords
- Subject: Currencies, Exports, Global value chains, Globalization, Imports, International trade, Money, Trade balance
- Keywords: aggregate exchange rate passthrough, business cycle dynamics, Currencies, dollar invoicing, Dollar invoicing, East Asia, EU exporter, EU importer, exchange rates, export platform, Exports, Global, global value chains, Global value chains, goods trade, gross export, Imports, interest rate shock, monetary policy, Trade balance
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- Working Paper