DP15493 Dominant currency dynamics: Evidence on dollar-invoicing from UK exporters

Author(s): Meredith A Crowley, Lu Han, Minkyu Son
Publication Date: November 2020
Date Revised: January 2021
Keyword(s): Exchange rate, firm-level trade, invoicing currency, Vehicle currency
JEL(s): F14, F31, F41
Programme Areas: International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15493

How do the choices of individual firms contribute to the dominance of a currency in global trade? Using export transactions data from the UK over 2010-2016, we document strong evidence of two mechanisms that promote the use of a dominant currency: (1) prior experience: the probability that a firm invoices its exports to a new market in a dominant currency is increasing in the number of years the firm has used the dominant currency in its existing markets; (2) strategic complementarity: a firm is more likely to invoice its exports in the currency chosen by the majority of its competitors in a foreign destination market in order to stabilize its residual demand in that market. We show that the introduction of a managerial fixed cost of currency management into a model of invoicing currency choice yields dynamic paths of currency choice that match our empirical findings.