Hedge your costs: exchange rate risk and endogenous currency invoicing
Novy, Dennis (2006) Hedge your costs: exchange rate risk and endogenous currency invoicing. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.765).
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The choice of invoicing currency for trade is crucial for the international transmission of macroeconomic policy. This paper develops a three-country model that endogenizes the choice of invoicing currency and that allows for a share of firms' costs to be denominated in foreign currency, consistent with the empirical evidence on the high degree of pass-through to import prices. Invoicing decisions are driven by firms' desire to hedge costs but also by exchange rate volatility and currency comovements. The model is tested empirically with a data set that spans ten currencies and 24 reporting countries, confirming the importance of currency comovements for the decision to invoice in vehicle currency. The findings also imply that if the U.S. share of world output continues to fall, other currencies will increasingly replace the U.S. dollar as an international vehicle currency.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Foreign exchange rates, Invoices, International finance, Dollar, American, Hedging (Finance)|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Official Date:||10 January 2006|
|Number of Pages:||36|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
Bacchetta, P., van Wincoop, E., 2003. Why Do Consumer Prices React Less Than Import Prices to Exchange Rates? Journal of the European Economic Association 1, pp. 662-670.
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