Dominant-currency pricing and the global output spillovers from US dollar appreciation

Abstract

We test for the empirical relevance of partial and asymmetric dominant-currency pricing (DCP), the hypothesis that large but not necessarily identical shares of economies’ export and import prices are sticky in US dollar. We first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing and local-currency pricing. Under partial and asymmetric DCP, the output spillovers from shocks that appreciate the US dollar decline with an economy's export-import US dollar pricing share differential, i.e. the difference between the share of an economy's export and import prices that are sticky in US dollar. Underlying this prediction is variation in an economy's net exports in response to US dollar appreciation that arises because the shares of export and import prices that are sticky in US dollar are different. We then provide evidence that this prediction from partial and asymmetric DCP is consistent with the data in a sample of up to 45 advanced and emerging market economies for the time period from 1995 to 2018. We moreover document that our findings are robust to considering US demand, US monetary policy and exogenous exchange rate shocks as a trigger of US dollar appreciation, zooming in on the responses of economies’ exports and imports, as well as to accounting for the role of commodity trade in US dollar invoicing.