Banco de la República
Cra. 4 # 7 - 14
Institutional Affiliation: Banco de la República
NBER Working Papers and Publications
|December 2016||Dominant Currency Paradigm|
with Gita Gopinath, Emine Boz, Federico J. Díez, Pierre-Olivier Gourinchas, Mikkel Plagborg-Møller: w22943
Most trade is invoiced in very few currencies. Yet, standard models assume prices are set in either the producer’s or destination’s currency. We present instead a ‘dominant currency paradigm’ with three key features: pricing in a dominant currency, pricing complementarities, and imported input use in production. We test this paradigm using both a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs that covers 91% of world trade, and very granular firm-product-country data for Colombian exports and imports. In strong support of the paradigm we find that: (1) Non-commodities terms of trade are essentially uncorrelated with exchange rates. (2) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and ...