{
  "title": "Global Trade and the Dollar",
  "publication": "IMF Working Papers, November 13, 2017",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/11/13/global-trade-and-the-dollar-45336",
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  "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 exch",
  "sections": [
    {
      "heading": "Summary and Key Findings",
      "content": "- The U.S. dollar exchange rate drives global trade prices and volumes.\n- 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:\n  - 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.\n  - 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates.\n  - 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation.\n    - 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.\n  - 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).\n- The findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms."
    },
    {
      "heading": "Data and Methods",
      "content": "- Data: Newly constructed bilateral price and volume indices for more than 2,500 country pairs.\n- 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.\n- Key empirical focus: Dollar exchange rate versus bilateral exchange rates in explaining price pass-through, trade elasticities, and terms-of-trade correlations."
    },
    {
      "heading": "Quantitative Results and Statistics",
      "content": "- Sample coverage: more than 2,500 country pairs.\n- Pass-through heterogeneity: importing country’s dollar invoicing share explains 15 percent of the variance of dollar pass-through/elasticity across country pairs.\n- 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)."
    },
    {
      "heading": "Implications and Interpretation",
      "content": "- 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.\n- 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.\n\nSource: IMF Working Paper \"Global Trade and the Dollar\" by Emine Boz, Gita Gopinath, and Mikkel Plagborg-Møller (November 13, 2017).\n\n---\n\n Content in this bundle\n\n- Global Trade and the Dollar, WP/17/239, November 2017\n  - Global Trade and the Dollar, WP/17/239, November 2017 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Global Trade and the Dollar, WP/17/239, November 2017 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/11/13/global-trade-and-the-dollar-45336"
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    "Authors: Emine Boz, Gita Gopinath, Mikkel Plagborg-Møller",
    "Published: November 13, 2017",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484327975.001",
    "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:",
    "The findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.",
    "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.",
    "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).",
    "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.",
    "**Global Trade and the Dollar, WP/17/239, November 2017**"
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