nep-ifn 2019-01-21 papers

on International Finance

Issue of 2019‒01‒21
two papers chosen by
Vimal Balasubramaniam
University of Oxford

Dominant currencies How firms choose currency invoicing and why it matters By Mary Amiti; Oleg Itskhoki; Jozef Konings
A Global Safe Asset for and from Emerging Market Economies By Markus K. Brunnermeier; Lunyang Huang

Dominant currencies How firms choose currency invoicing and why it matters

By:	Mary Amiti (Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045); Oleg Itskhoki (Princeton University, Department of Economics, Princeton, NJ 08544); Jozef Konings (University of Liverpool Management School, Chatham St, Liverpool L69 7ZH, UK and Katholieke Universiteit Leuven, Department of Economics, Naamsestraat 69, 3000 Leuven, Belgium)
Abstract:	Large movements in exchange rates have small eects on the prices of internationally traded goods. Using a new dataset on currency invoicing of Belgian rms, we study how the currency of invoicing interacts with rm characteristics in shaping the extent of exchange rate pass-through at dierent time horizons. The US dollar and the Euro are the dominant currencies in both Belgium’s exports and imports, with substantial variation in currency choice across rms and products even within narrowly dened manufacturing industries. We nd that smaller, nonimport-intensive rms tend to denominate their exports in euros (producer currency pricing) and exhibit nearly complete exchange-rate pass-through into destination currency prices at all horizons. In contrast, the largest most import-intensive rms, and in particular with imports denominated in US dollars, tend to also denominate their exports in US dollars (dominant currency pricing) and exhibit very low passthrough in the short run, which gradually increases to 40–50% pass-through at the annual horizon. We show that these empirical patterns are in line with the predictions of a theoretical framework featuring heterogeneous rms with variable markups, endogenous international input sourcing and staggered price setting with endogenous currency choice. We plan to use a variant of a such model, disciplined with the Belgian rm-level data, for counterfactual analysis of the gradual increase in the use of the euro in international trade flows.
Keywords:	inflation forecastsmonthly consumer and producer surveysqualitative survey informationmodel-consistent expectationsJDemetra+ SSF library
JEL:	E31 E37
Date:	2018–10
URL:	http://d.repec.org/n?u=RePEc:nbb:reswpp:201810-353&r=all

A Global Safe Asset for and from Emerging Market Economies

By:	Markus K. Brunnermeier; Lunyang Huang
Abstract:	This paper examines how a newly designed global safe asset can mitigate international capital flows induced by flight-to-safety. In the model domestic investors have to co-invest in a safe asset along with their physical capital. At times of crisis, investors replace the initially safe domestic government bonds with safe US Treasuries and re-sell part of their capital. The reduction in physical capital lowers GDP and tax revenue, leading to increased default risk justifying the loss of the government bond's safe-asset status. We compare two ways to mitigate this self-fulfilling scenario. In the “buffer approach” international reserve holding reduces the severity of a crisis. In the “rechannelling approach” flight-to-safety capital flows are rechannelled from international cross-border flows to flows across two EME asset classes. The two asset classes are the senior and junior bond of tranched portfolio of EME sovereign bonds.
JEL:	E42 E43 F32 F33
Date:	2018–12
URL:	http://d.repec.org/n?u=RePEc:nbr:nberwo:25373&r=all

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