Journal of Monetary Economics

Dominant currency pricing in international trade of services

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Giovedì, Aprile 25, 2024

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Abstract

Key Points:

Abstract
We analyze, for the first time, how firms choose the currency in which they price transactions
in international trade of services and investigate, using direct evidence, whether the US dollar
(USD) plays a dominant role in services trade.
JEL: F14, F31, F41
Keywords: dominant currency paradigm, international trade, services.
Related research has
shown that the US dollar (USD) exchange rate is a major source of swings in
global trade in goods?a ?dominant currency pricing? (DCP) phenomenon?since
most goods traded internationally are invoiced and sticky in USD.
Yet it is also key to look at dominant currency pricing in international trade
in services for several reasons.
First, global trade in services is big?accounting for
about a quarter of global gross trade flows and for around 40% in terms of valueadded trade.
Third, and relatedly, the
future of globalisation might be in trade in intermediate services?as progress with
digitech lowers technological barriers to such trade across borders.
But perhaps the main reason is that trade in services is conceptually different
from trade in goods.
Our paper is the first, to our best knowledge, that analyzes how firms choose
the currency in which they price transactions in international trade of services and
that examines whether dominant currency pricing differs between trade in goods
and services using direct evidence? hitherto unavailable?on patterns of currency
choices in international transactions in services compared to goods.
Work on dominant currency pricing has
almost exclusively focused on trade in goods.
One reason is that data on patterns
in invoicing currency for trade in services are ?virtually nonexistent? (Adler et al.
Yet it is important to look at dominant currency pricing in international trade
in services for several reasons.
Using the exporter?s (or producer) currency in exports is known in the literature as producer
currency pricing (PCP), while using the importer?s currency is known as local currency pricing (LCP)
and using a third currency is known as vehicle currency pricing (VCP).
Our paper is the first, to our best knowledge, that analyzes how firms choose the
currency in which they price transactions in international trade of services and that
examines whether dominant currency pricing differs between international trade in
goods and services using direct evidence ? hitherto unavailable ? on patterns of
currency choices in international transactions in services compared to goods.
First,
we rule out compositional effects, that is that differences in the use of currencies
reflect differences in trade partners in services vs. goods trade.
Both in extra-EU and intra-EU trade, the EUR is the
most widely used currency, be it on the export or import side.
Based
on the framework, we stress which factors should determine currency choices in
international trade, and to what extent one should expect differences between
services trade and goods trade.
Second, it can price in the importer?s currency
(local currency pricing, LCP).4 Third, it can use a third currency, say currency
v (vehicle currency pricing, VCP).
That is,
the currency choice problem is equivalent to determining the currency in which the
desired price is least volatile.
(2022)
provide systematic empirical evidence ? firm size and exposure to foreign currencies
in imported inputs ? should also shape currency choices in services trade.
Dominant currency pricing in USD ? services vs. goods trade
Having established that currency choice in international trade of services is an
active firm-level decision as well as the determinants of this decision, we now
8.
Services and goods exports: prevalence of different pricing strategies (percent)
Notes: The table shows the shares (in value terms) of different pricing strategies: producer currency
pricing (PCP), local currency pricing (LCP) and vehicle currency pricing (VCP).
To make comparisons with goods trade, we rely on Eurostat?s
macro data on international trade in goods by invoivcing currency.
If intra-EU trade is more important in services than
in goods trade, this could hence be an explanation for the lower prevalence of the
USD in services trade.
We showed
that while the USD is also extensively used as a vehicle currency in services trade, its
prevalence is systematically lower than in goods trade.
Hence for all travel services exports
the invoicing currency is the EUR; for travel imports it is the currency of the
destination of travel (i.e.
Also for these
ECB Working Paper Series No 2932

33

services it seems plausible that trade does not take place vis-?-vis all counterparts
in each currency.
Figure B.2: Share of international trade in services in global GDP broken down by type (%)
Notes: Authors? calculations using World Bank and World Trade Organization data.
An earlier version of this paper circulated under the title ?Currency choices and the role of the
U.S. dollar in international services trade?.

What does new micro price evidence tell us about inflation dynamics and monetary policy transmission?

Retrieved on:

Giovedì, Aprile 25, 2024

To understand inflation dynamics, it is necessary to analyse how often and by how much individual prices change.

Key Points:

To understand inflation dynamics, it is necessary to analyse how often and by how much individual prices change.
This article discusses what micro price data gathered by the European System of Central Banks’ Price-setting Microdata Analysis Network (PRISMA) tell us about the way firms set their prices.

Nowcasting consumer price inflation using high-frequency scanner data: evidence from Germany

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Martedì, Aprile 23, 2024

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Monetary asmmetries without (and with) price stickiness

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Venerdì, Aprile 19, 2024

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Is home bias biased? New evidence from the investment fund sector

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Giovedì, Aprile 18, 2024

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Central bank digital currency and monetary policy implementation

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Giovedì, Aprile 18, 2024

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Transactional demand for central bank digital currency

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Giovedì, Aprile 18, 2024

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Digital euro safeguards – protecting financial stability and liquidity in the banking sector

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Giovedì, Aprile 18, 2024

A digital euro would offer a wide range of

Key Points:

A digital euro would offer a wide range of
financial stability benefits, including safeguarding the role of public money and
strengthening the strategic autonomy and monetary sovereignty of the euro area in
the digital era.
Keywords: CBDC, digital euro, bank intermediation, financial stability risks.
A digital euro has the potential to offer a wide range of financial stability
benefits for the digital era.
A digital euro would
stimulate financial innovation among private sector entities and enhance the
efficiency and resilience of the financial system by supporting competition and
diversity within it.3 In addition, a digital euro would strengthen the strategic autonomy
and monetary sovereignty of the euro area.
A digital euro would be designed to minimise risks to the financial system.
2
The preparation phase will pave the way for a future decision on whether or not to issue a digital euro.
When gauging the implications for the euro area banking sector of introducing a
digital euro, take-up would be key, as it would determine the level of deposit
outflows.
In the latter case, the
issuance of a digital euro would not affect banks? balance sheets, since banks would return euro
banknotes to the Eurosystem in exchange for digital euro.
Banknotes and digital euro are two different
types of central bank liability, so a swap between banknotes and digital euro would only affect the
composition and not the size of the Eurosystem?s balance sheet.
In our analysis, we model only the
substitution of commercial bank deposits with a possible future digital euro.
8
The legislative proposal on a digital euro provides for the inclusion of such safeguards and establishes
specific criteria for the limits, aiming to contain the use of a digital euro as a store of value.
ECB Occasional Paper Series No 346
4

2

The added value of digital euro
safeguards such as holding limits
To understand the benefits of digital euro safeguards, such as holding limits, it
is useful to first consider the implications of introducing a CBDC without
adequate safeguards.
(2022), ?Central bank digital currency and bank intermediation: Exploring different
approaches for assessing the effects of a digital euro on euro area banks?, Occasional Papers, No 293,
European Central Bank, Frankfurt am Main, May.
deciding to adopt the digital euro, and (ii) the average amount of digital euro in a
wallet.
At the same time, as discussed in this paper, the design of a digital euro would
include effective safeguards, such as individual holding limits, to mitigate
potential financial stability risks.
ECB Occasional Paper Series No 346
15

an upper bound on the amount of digital euro in circulation, thereby addressing and
limiting financial stability concerns associated with the introduction of a digital euro.
(2023), ?A digital euro: gauging the
financial stability implications?, Financial Stability Review, ECB, November.

As interest rates surge: flighty deposits and lending

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Venerdì, Aprile 5, 2024

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ECB Consumer Expectations Survey results – February 2024

Retrieved on:

Mercoledì, Aprile 3, 2024

This box investigates how households have responded to the 2021-23 inflationary episode using evidence from the ECB’s Consumer Expectations Survey.

Key Points:

This box investigates how households have responded to the 2021-23 inflationary episode using evidence from the ECB’s Consumer Expectations Survey.
The findings suggest that households have primarily adjusted their consumption spending to cope with higher inflation.