The International Price System: Macro and Micro Evidence

Project Outcomes Statement

We investigate the nature of price setting in global trade, exploring the special role of the world's dominant currency, the U.S. dollar, in international trade. The goal is to provide new empirical facts and to explore how monetary, fiscal, productivity and financial shocks transmit across countries when the vast majority of world trade is invoiced in dollars.

There are about 180 currencies in the world, but a very small number of dominant currencies play an outsize role in international trade, finance, and central bank foreign exchange reserves. In the modern era, the US dollar has a dominant international presence, followed to a lesser extent by the euro and a handful of other currencies. The importance of currencies is never more evident than in global trade, where exchange rates are often at the center of fierce economic and political debates. Indeed, the use of currencies in international trade is key for the international transmission of shocks and the design of optimal monetary and exchange rate policy in an open economy. The use of currency in international trade is not exogenous, but is instead the consequence of active firm-level decisions at the micro level with important allocative, policy and welfare consequences at the macro level. All this aspects of dominant currency foundation and implications form the broad focus of this project, which resulted in a number of published and working papers.

As a result of this project a number of papers listed below were written, revised and published. Many students at Harvard and UCLA and elsewhere were involved in the work on this project, received training, wrote dissertations, and found academic and policy jobs.

We summarize the results of this project and of the broader literature on dominant currencies in a new Handbook on International Economics chapter "Dominant Currency Paradigm: A Review" published in 2022 as the result of the work on this project. Further summary of the work on this project is contained in the NBER Reporter article "Dominant Currencies" published in March 2022.

Main publications:

1. Boz, Emine, Gita Gopinath, and Mikkel Plagborg-Moller. 2019. "Dollar Invoicing and the Heterogeneity of Exchange Rate Pass-Through." American Economic Association Papers and Proceedings, 109 (May): 527-532 .

2. Gopinath, Gita, Emine Boz, Camila Casas, Federico J. Diez, Pierre-Olivier Gourinchas, and Mikkel Plagborg-Moller. 2020. "Dominant Currency Paradigm." American Economic Review, 110 (3): 677-719.

3. Gita Gopinath and Jeremy C Stein. 2021. "Banking, Trade, and the Making of a Dominant Currency." The Quarterly Journal of Economics, 136 (2): 783-830, https://doi.org/10.1093/qje/qjaa036

4. Cavallo, Alberto, Gita Gopinath, Brent Neiman, and Jenny Tang. 2021. "Tariff Pass-Through at the Border and at the Store: Evidence from US Trade Policy." American Economic Review: Insights, 3 (1): 19-34.

5. Itskhoki, Oleg. 2021. "The Story of the Real Exchange Rate." Annual Review of Economics, 13 (1): 423-455.

6. Amiti, Mary, Oleg Itskhoki, and Jozef Konings. 2022. "Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters." The Quarterly Journal of Economics, 137 (3): 1435-1493, https://doi.org/10.1093/qje/qjac004

7. Gopinath, Gita and Oleg Itskhoki. 2022. "Dominant Currency Paradigm: A Review." In Handbook of International Economics, Volume 6, Editors: Gopinath, Gita, Elhanan Helpman, and Kenneth Rogoff. Amsterndam, Netherlands: Elsevier, 45-90.