{
  "title": "Dominant Currency Paradigm: A New Model for Small Open Economies",
  "publication": "IMF Working Papers, November 22, 2017",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/11/22/dominant-currency-paradigm-a-new-model-for-small-open-economies-45431",
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  "summary": "Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Most trade is invoiced in very few currencies.  \n- The Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency.  \n- The paper models a “dominant currency paradigm” for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities; and imported input use in production."
    },
    {
      "heading": "Model features",
      "content": "- Pricing in a dominant currency.  \n- Pricing complementarities.  \n- Imported input use in production."
    },
    {
      "heading": "Key findings and implications",
      "content": "- Under the dominant currency paradigm:\n  - (a) the terms-of-trade is stable;\n  - (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods;\n  - (c) exchange rate pass-through of non-dominant currencies is small;\n  - (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all;\n  - (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade;\n  - (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap."
    },
    {
      "heading": "Empirical evidence",
      "content": "- Using data from Colombia the authors document strong support for the dominant currency paradigm."
    },
    {
      "heading": "Policy implications",
      "content": "- Optimal monetary policy should respond to:\n  - deviations from the law of one price arising from dominant currency fluctuations;\n  - traditional targets of inflation and the output gap.\n- Recognition that expenditure switching occurs mostly via imports and is driven by the dollar exchange rate has implications for exchange-rate and trade policy effectiveness in small open economies.\n\nDominant Currency Paradigm: A New Model for Small Open Economies — By Camila Casas, Federico J Diez, Gita Gopinath, Pierre-Olivier Gourinchas; November 22, 2017; IMF Working Papers 2017, 264 (2017).\n\n---\n\n Content in this bundle\n\n- Dominant Currency Paradigm: A New Model for Small Open Economies, WP/17/264, November 2017\n  - Dominant Currency Paradigm: A New Model for Small Open Economies, WP/17/264, November 2017 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Dominant Currency Paradigm: A New Model for Small Open Economies, WP/17/264, November 2017 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/11/22/dominant-currency-paradigm-a-new-model-for-small-open-economies-45431"
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    "Authors: Camila Casas, Federico J Diez, Gita Gopinath, Pierre-Olivier Gourinchas",
    "Published: November 22, 2017",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484330173.001",
    "Most trade is invoiced in very few currencies.",
    "The Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency.",
    "The paper models a “dominant currency paradigm” for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities; and imported input use in production.",
    "Pricing in a dominant currency.",
    "Pricing complementarities.",
    "Imported input use in production.",
    "Under the dominant currency paradigm:",
    "Using data from Colombia the authors document strong support for the dominant currency paradigm.",
    "Optimal monetary policy should respond to:",
    "Recognition that expenditure switching occurs mostly via imports and is driven by the dollar exchange rate has implications for exchange-rate and trade policy effectiveness in small open economies.",
    "**Dominant Currency Paradigm: A New Model for Small Open Economies, WP/17/264, November 2017**"
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