Currency Invoicing: The Role of ‘Herding’ and Exchange Rate Volatility

Abstract

This paper analyzes an individual firm's choice of invoicing currency under exchange rate volatility. Greater exchange rate volatility amplifies the representative firm's desire to ‘herd’ relative to all other considerations that may affect the currency denomination decision. By ‘herding’ a firm chooses a currency of denomination so that the firm's price and the competition's price are affected by the exchange rate in a similar manner. Contrary to previous research, the results herein suggest that individual firms may invoice in a relatively volatile currency as long as its competitor's invoice in the same volatile currency.