Year: 2022
Type: article
Abstract: We analyze how firms choose the currency of invoicing and the implications of this choice for exchange rate pass-through into export prices and quantities. Using a new data set for Belgian firms, we find currency invoicing to be an active firm-level decision, shaped by the firm’s size, exposure to imported inputs, and the currency choices of its competitors. Our results show that a firm’s currency choice, in turn, has a direct causal effect on the exchange rate pass-through into prices and quantities. Moreover, the differential price response of similar firms that invoice in different currencies is large, persists beyond a one-year horizon, and gradually wanes in the long run. This results in allocative expenditure-switching effects on export quantities, which build up over time, suggesting a role for quantity adjustment frictions in addition to price stickiness. Our findings shed light on the mechanisms that make or break a dominant currency and the consequences it has for the international transmission of shocks.
DOI: 10.1093/qje/qjac004
Authors: Mary Amiti, Oleg Itskhoki, Jozef Konings
Language: English
Topic: Global trade and economics
Domain: Social Sciences
Open Access status: bronze
Funder: KU Leuven
OpenAlex ID: W3136654298