Working Paper: CEPR ID: DP9447
Authors: Linda Goldberg; Cédric Tille
Abstract: We develop a theoretical model of international trade pricing in which individual exporters and importers bargain over the transaction price and exposure to exchange rate fluctuations. We find that the choice of price and invoicing currency reflects the full market structure, including the extent of fragmentation and the degree of heterogeneity across importers and across exporters. Our study shows that a party has a higher effective bargaining weight when it is large or more risk tolerant. A higher effective bargaining weight of importers relative to exporters in turn translates into lower import prices and greater exchange rate pass-through into import prices. We show the range of price and invoicing outcomes that arise under alternative market structures. Such structures matter not only for the outcome of specific exporter-importer transactions, but also for aggregate variables such as the average price, the average choice of invoicing currency, and the correlation between invoicing currency and the size of trade transactions.
Keywords: currency; invoicing; exchange rate
JEL Codes: F30; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher effective bargaining weight of importers (F14) | Lower import prices (F14) |
| Larger, more risk-tolerant importers (F10) | Higher effective bargaining weight of importers (F14) |
| Market structure (fragmentation and heterogeneity) (F12) | Effective bargaining weight of importers (F14) |
| Effective bargaining weight of importers (F14) | Exchange rate pass-through (F31) |
| Effective bargaining weight of importers (F14) | Transaction price (D44) |
| Market structure (fragmentation and heterogeneity) (F12) | Transaction price (D44) |
| Higher effective bargaining weight of importers (F14) | Greater exchange rate exposure (F31) |