Seminar 17 January 2014
Imported Inputs and Invoicing Currency Choice: Theory and Evidence from UK Transaction Data
A large proportion of international trade is in intermediate goods. This paper asks whether exporters’ dependence on imported inputs affects their choice of invoicing currency. I first build a model to show that exporters more dependent on foreign currency-denominated inputs are more likely to price in the foreign currency. The intuition is that pricing in the foreign currency provides a natural hedge against exchange rate uncertainty. I then test the model’s prediction using a unique dataset that covers all UK import and export transactions with non-EU countries. I provide firm-level evidence by matching import and export data and relate exporters’ invoicing currency choice to import behaviour. These findings strongly support the theoretical prediction and have strong implications for the variation of exchange rate pass-through and inflation across industries.
JEL Classification: F1, F31, F41.
Keywords: Invoicing Currency, Exchange Rate Pass-through, Trade in Intermediate Goods.
Contact: Pascalis Raimondos-Møller
Porcelænshaven 16A, room 2.80