What is the impact of changes in the U.S. dollar exchange rate for households and firms around the globe? How do these changes impact inflation and trade competitiveness? What are the implications for optimal monetary policy and international spillovers of policy? This project provides new models and new empirical evidence to answer these questions. First, the PI will collect and compile data from a large sample of countries on two different issues. First, the extent to which firms in each country use the U.S. dollar vs other currencies for invoicing. Second, export and import price indices each country. The resulting data will demonstrate how the dominance of the US dollar in trade invoicing creates differences across countries in how exchange rate fluctuations affect national economies. Graduate students assisting in this project will gain important skills in analyzing international economic data. The PI and collaborators will also use unusually detailed data to examine how changes in the value of the dollar affect individual exporting and importing firms in one U.S. trading partner country (Columbia). The project will model different factors that determine how firms respond to exchange rates and how those responses in turn help to determine exchange rates. Finally, the PI will draw conclusions about how US monetary policy affects other countries and the competitiveness of the U.S. economy.
The foundations of international macroeconomics as a science rely on a deep understanding of the interconnectedness between a country's exchange rate, its trade competitiveness, its inflation rate, and the economic welfare of its residents and firms. The project advances knowledge on this topic with novel macroeconomic evidence on the relationship between the currency of invoicing of a country's imports and exports and pass-through of its exchange rate to inflation and to its terms of trade. The second project employs a novel micro data set on Columbian firms that combines customs data with production and balance sheet information. These unusually detailed data allow the PI and her team to explore the expenditure switching, imported input costs and balance sheet channels through which exchange rate fluctuations impact firms.