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Faculty of Economics

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Crowley, M. A., Han, L. and Son, M.

Dominant Currency Dynamics: Evidence on Dollar-invoicing from UK Exporters

CWPE20113

Abstract: 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.

Keywords: Exchange rate, invoicing currency, firm-level trade, vehicle currency

JEL Codes: F14 F31 F41

Author links: Meredith Crowley  Minkyu Son  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe20113.pdf

Open Access Link: https://doi.org/10.17863/CAM.62848