Working Paper: NBER ID: w23988
Authors: Emine Boz; Gita Gopinath; Mikkel Plagborg-Møller
Abstract: We document that the U.S. dollar exchange rate drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1% U.S. dollar appreciation against all other currencies in the world predicts a 0.6--0.8% decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country's share of imports invoiced in dollars explains 15% of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.
Keywords: US dollar; global trade; exchange rates; price passthrough; monetary policy
JEL Codes: E5; F1; F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary policy-induced fluctuations in the dollar exchange rate (F31) | passthrough into bilateral import prices (F16) |
| dollar exchange rate (F31) | bilateral import prices (F14) |
| bilateral non-commodities terms of trade (F14) | bilateral exchange rates (F31) |
| 1% appreciation of the US dollar (F31) | total trade volume among countries outside the US (F10) |
| share of imports invoiced in dollars (F10) | variance in dollar passthrough elasticity across country pairs (F31) |