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.