Working Paper: CEPR ID: DP6704
Authors: Linda S. Goldberg; Cédric Tille
Abstract: The U.S. dollar holds a dominant place in the invoicing of international trade, along two complementary dimensions. First, most U.S. exports and imports invoiced in dollars. Second, trade flows that do not involve the United States are also substantially invoiced in dollars, an aspect that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that even though exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal policy.
Keywords: Center-Periphery; Exchange Rate; Passthrough; Invoicing; Monetary Policy
JEL Codes: F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Center's monetary policy (E52) | Consumption in peripheral countries (F61) |
| Center's monetary policy (E52) | Inefficient price movements among periphery countries (F31) |
| Coordinated monetary policies (E61) | Improved welfare outcomes in peripheral countries (D69) |
| Productivity shocks (O49) | Welfare of various countries (I31) |