Bilateral Trade in Services and Exchange Rates: Evidence of Dominant Currency Pricing

IMF Working Papers, November 22, 2024

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The paper estimates, for the first time, the exchange rate elasticity of bilateral trade in services, providing indirect evidence of both producer currency pricing and dominant currency pricing in services trade.
The value of services trade is more closely associated with US dollar exchange rates than with bilateral exchange rates, similar to findings for manufacturing trade.
The relationship between trade values and dollar versus bilateral exchange rates varies by service category.
In tourism, where proxies for trade volume (such as tourist arrivals and hotel stays) are available, bilateral exchange rates play a larger role on tourism volume compared to the dollar exchange rates.
In the context of global supply chains, downstream dollar exchange rate movements, rather than downstream bilateral exchange rates, affect the demand for service imports via forward linkages.

Developed a novel dataset of bilateral trade flows in services covering twelve broad service sectors across 245 countries from 1985 to 2022.
The analysis focuses on exchange rate elasticities of bilateral services trade and comparisons between producer currency pricing and dominant (US dollar) currency pricing.

The dominance of the US dollar in explaining trade value is not uniform; the strength of dollar versus bilateral exchange rate effects varies across service categories.
Tourism is an exception in volume terms: bilateral exchange rates have a larger impact on tourism volume measures (tourist arrivals, hotel stays) than do dollar exchange rates.

Downstream dollar exchange rate movements influence demand for imported services via forward linkages.
Downstream bilateral exchange rates are less influential on such demand compared to downstream dollar movements.

Evidence points to coexistence of producer currency pricing and dominant currency pricing in services trade, with dominant currency effects (USD) prominent in values but bilateral rates more relevant for tourism volumes.
For analyses of services trade and exchange rate pass-through, attention to sectoral differences and global value chain positions is important.

IMF Working Paper — Nan Li; Sergii Meleshchuk; November 22, 2024.