Does the dollar have a large effect on global trade?- Yes
A recent paper by Gopinath et al. (2020), namely “Dominant currency paradigm”, argues that a disproportionate share of global trade is invoiced in US dollars and therefore trade prices follow movements in the dollar: when the dollar is overvalued, trade may be suppressed because the prices of traded goods are artificially high. In this paper Ma et al. extend the model in Gopinath et al. (2020) by introducing a new variable to instrument the dollar and hence circumvent the challenge emanating from the dollar’s endogeneity. In particular, they show that domestic housing activity in the United States can predict the dollar one year ahead. At the same time, changes to the domestic demand and supply for U.S. housing are unlikely to directly affect trade flows between third countries.
They find that changes to a country’s exchange rate vis-a-vis the dollar are fully passed through to import prices and that trade quantities decline notably with dollar appreciation.
The Causal Effect of the Dollar on Trade
Authors: Sai Ma, Tim Schmidt-Eisenlohr, Shaojun Zhang
From: Federal Reserve Board, Ohio State University, Ohio State University
Does the dollar have a large effect on global trade?- No
In this commentary Sarsenbayev and Gagnon examine 22 economies to see if the substantial dollar appreciation of 2014–15 raised their export prices. During this period the dollar appreciated against nearly all currencies, by an average of around 20 percent, making this time frame a natural experiment to test whether the dollar has any major and persistent effect on prices in global trade. They find that:
- Export prices increased only in Israel and Thailand;
- In other economies, export prices followed domestic prices or a trade-weighted average of prices in foreign currencies;
- For a few economies in Europe, export prices appeared to follow the euro;
- Finally, the evidence indicates that any effect of dollar invoicing on trade prices is very brief and does not create a lasting distortion in global trade.
Does the dollar have an outsized effect on trade prices?
By: Madi Sarsenbayev, Joseph E. Gagnon – Peterson Institute for International Economics
