Working Paper: CEPR ID: DP15493
Authors: Meredith A. Crowley; Lu Han; Minkyu Son
Abstract: How do the choices of individual firms contribute to the dominance of a currency in global trade? Using export transactions data from the UK over 2010-2016, we document strong evidence of two mechanisms that promote the use of a dominant currency: (1) prior experience: the probability that a firm invoices its exports to a new market in a dominant currency is increasing in the number of years the firm has used the dominant currency in its existing markets; (2) strategic complementarity: a firm is more likely to invoice its exports in the currency chosen by the majority of its competitors in a foreign destination market in order to stabilize its residual demand in that market. We show that the introduction of a managerial fixed cost of currency management into a model of invoicing currency choice yields dynamic paths of currency choice that match our empirical findings.
Keywords: exchange rate; invoicing currency; firm-level trade; vehicle currency
JEL Codes: F14; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Prior experience with dollar invoicing (F33) | Probability of a firm invoicing in dollars in new markets (F31) |
| Competitors' dollar invoicing share (L42) | Firm's probability of invoicing in dollars (E39) |