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Title: Macroeconomic Interdependence and the International Role of the Dollar

Author(s): Linda S. Goldberg and Cédric Tille

Publication Date: February 2008

Keyword(s): center-periphery, exchange rate pass-through, invoicing and monetary policy

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Goldberg, L and Tille, C. 2008. 'Macroeconomic Interdependence and the International Role of the Dollar'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6704