Recent literature in international macroeconomics departs from the standard open-economy framework under which export prices are set in the producer’s currency. Instead, it postulates a dominant currency paradigm whereby export prices are instead set in a so-called vehicle currency (Gopinath 2015, Gopinath et al. 2020).
A key observation underlying this paradigm is that most global trade transactions are invoiced in just a few currencies – most often the US dollar, sometimes the euro – regardless of the countries involved in the transaction (Coeuré 2019, Ilzetzki et al. 2020, Maggiori et al. 2019). It is critical to establish whether more recent and comprehensive data support this observation, since the predictions of the dominant currency paradigm differ from those of the standard producer currency pricing along several dimensions: the impact of exchange rate movements, the conduct of monetary policy, and the international spillovers of monetary policy from countries that issue a dominant currency.
To that end, in a recent paper we assemble the most comprehensive and up-to-date panel data set of trade invoicing currency patterns for major currencies (Boz et al. 2020). The data set provides the respective annual shares of exports and imports invoiced in US dollars, euros, home currencies, and other currencies for 102 countries over the period from 1990 to 2019. The data set is publicly available and can be downloaded from the IMF’s website.1
Overall, the countries in the data set account for about 75% of global trade. Although coverage is sparse for the 1990s, it is quite comprehensive in more recent periods. In total, we have nearly 1,200 country-year observations each for imports and exports. The data are obtained from official sources through the websites and from requests sent to central banks, statistics offices and customs/revenue authorities.
The data set covers a diverse sample of countries, including 40 countries from Europe, 20 from Asia, 22 from Africa, 11 from Latin America, 4 from Oceania, 3 from the Middle East, and 2 from North America. The country coverage is also diverse in terms of income levels: 35 countries are advanced economies, and the remaining 67 are emerging market and developing economies.
The substantial improvement in cross-country coverage of trade invoicing data, which is our paper's main contribution, is essential to fostering further research in international macroeconomics. For instance, Ito and Chinn (2014: 8) note that, “in contrast to the relatively rich theoretical literature on the choice of currency for trade invoicing, the empirical literature is thin. The paucity of empirical literature is due to data availability.”
Our paper is hence related to earlier efforts on assembling cross-country data sets of trade invoicing currency patterns. We contribute to this literature along several dimensions. Compared with Gopinath (2015), our data set includes twice as many countries and, perhaps more importantly, also a time dimension. Relative to other earlier data sets – such as Kamps (2006), Goldberg and Tille (2008) and Ito and Chinn (2014) – ours covers between two and four times as many countries and has more systematic coverage over time. It is noteworthy that, compared with these earlier studies, our data set contains information on a much larger number of emerging market and developing economies, for which vehicle currency use is more relevant. Finally, we improve data quality for EU countries significantly over existing data sets by exploiting internal ECB information to ensure that definitions of invoicing currency data are harmonised with regard to trading partner composition. This contribution is important because European countries account for a large share of our, and earlier, country samples.
The data set’s broad time-series coverage allows us to document several stylised facts about the evolution of global and regional trade invoicing. The data confirm previous findings (e.g. Gopinath 2015) on the US dollar's dominance and on the overall stability of invoicing currency patterns in global trade. However, they also reveal several novel stylised facts.
First, the data indicate that dollar and euro invoicing have both increased over time – despite the decline in the share of global trade accounted for by the US and the euro area. This is apparent from Figure 1, which shows the increasing concentration of invoicing in US dollars and euros over time. The implication is that vehicle currency use has been on the rise.
Figure 1 Global trade and invoicing currency shares over time
Note: The left panel depicts the evolution of the share of exports to the US, the euro area (EA), and the rest of the world in total global exports; the right panel plots the share of global exports that are invoiced in US dollars, euros, and other currencies. Only exports to countries for which we have invoicing data are considered. The graphs are based on interpolated and extrapolated data.
Moreover, the data indicate notable changes in invoicing currency patterns for several countries in specific circumstances. In particular, countries that joined the euro area or the EU, EU candidate countries, and other European countries have experienced marked increases in the use of the euro as an invoicing currency – increases that typically occurred at the expense of the dollar. Figure 2 illustrates this point by showing the full time-series data for selected European countries.2 The increase in these countries’ export shares invoiced in euros is striking, especially when one considers that the shares of exports destined to the euro area have either been fairly stable or exhibited only modest increases. The rise in the share of exports invoiced in euros is typically paralleled by a decline in the share invoiced in US dollars. These findings are consistent with the theoretical literature's emphasis (Gopinath and Stein 2018, Mukhin 2018) on the role of history, path dependence, and nonlinearities in the choice of a trade invoicing currency, including discrete events such as the establishment of currency unions and episodes of comprehensive institutional integration.
Figure 2 Evolution of invoicing and export shares for selected European countries
Note: The figure plots the evolution of US dollar (solid blue lines) and euro export (solid red lines) invoicing shares as well as US (dashed red lines) and EA (dashed blue lines) export shares.
In order to illustrate the usefulness of the data set, we follow the existing literature and explore the role of vehicle currency invoicing for exchange rate pass-through to import prices and trade volumes. Combining our new data set on invoicing currency patterns with expanded and updated data sets for bilateral trade price and volume indices, we find the pass-through to import prices and trade volumes from fluctuations in US dollar exchange rates to be higher than from fluctuations in the bilateral exchange rate between the importer's and the exporter's currencies. The propensity to invoice international trade transactions in US dollars drives the importance of the dollar exchange rate. For instance, our estimates indicate that a onepercentage point increase in the dollar invoicing share leads to a 0.3-0.6 percentage point increase in the dollar pass-through, where the value depends on whether we use results from weighted or rather from unweighted regressions (and where the former are more representative of larger economies). These findings confirm the results of Gopinath et al. (2020), who conduct similar analyses on a smaller sample.
The new data set is intended to foster additional research in many areas of open-economy macroeconomics. For example, the data can help explore the relationship between invoicing currencies and the effects of exchange rate movements, deepening trade integration or the prominence of global value chains, as well as the role of international currencies, the conduct of monetary policy and international spillovers, which could prove more demanding in a post-COVID-19 world.
Authors’ note: The views expressed in this paper are those of the authors and do not necessarily reflect those of the IMF, the ECB, the Eurosystem, the Banco de la República (or their Board of Directors) and should not be reported as such.
Boz, E, C Casas, G Georgiadis, G Gopinath, H Le Mezo, A Mehl and T Nguyen (2020), “Patterns in Invoicing Currency in Global Trade”, IMF Working Paper 20/126.
Coeuré, B (2019), “Should the ECB care about the euro’s global role?”, VoxEU.org, 25 February.
Goldberg, L and C Tille (2008), “Vehicle-currency Use in International Trade”, Journal of International Economics 76: 177–192.
Gopinath, G (2015), “The International Price System”, NBER Working Paper 21646.
Gopinath, G, E Boz, C Casas, F Diez, P O Gourinchas and M Plagborg-Moller (2020), “Dominant Currency Paradigm”, American Economic Review 110: 677–719.
Gopinath, G, O Itskhoki and R Rigobon (2010), “Currency Choice and Exchange Rate Pass-Through”, American Economic Review 100: 304–336.
Gopinath, G and J Stein (2018), “Banking, Trade, and the Making of a Dominant Currency”, NBER Working Paper 24485.
Ilzetzki, E, C Reinhart and K Rogoff (2020), “Why is the Euro Punching Below its Weight?”, Economic Policy, forthcoming.
Ito, H and M Chinn (2014), “The Rise of the “Redback” and the People’s Republic of China’s Capital Account Liberalization: An Empirical Analysis of the Determinants of Invoicing Currencies”, ADBI Working Paper 473.
Kamps, A (2006), “The Euro as Invoicing Currency in International Trade”, ECB Working Paper 665.
Maggiori, M, B Neiman and J Schreger (2019), „The Rise of the Dollar and Fall of the Euro as International Currencies”, AEA Papers and Proceedings 109: 521–526.
Mukhin, D (2018), “An Equilibrium Model of the International Price System”, mimeo.
2 The euro shares prior to 1999 are calculated as the sum of the underlying currencies.