Template-Type: ReDIF-Paper 1.0
Author-Name: David Cook
Author-X-Name-First: Davied
Author-X-Name-Last: Cook
Author-Name: Nikhil Patel
Author-X-Name-First: Nikhil
Author-X-Name-Last: Patel
Title: Dollar invoicing, global value chains, and the business cycle dynamics of international trade
Abstract: Recent literature has highlighted that international trade is mostly priced in a few key vehicle currencies, and is increasingly dominated by intermediate goods and global value chains (GVCs). Taking these features into account, this paper reexamines the business cycle dynamics of international trade and its relationship with monetary policy and exchange rates. Using a three country dynamic stochastic general equilibrium (DSGE) framework, it finds key differences between the response of final goods and GVC trade to both internal and external shocks. In particular, the model shows that in response to a dollar appreciation triggered by a US interest rate increase, direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand. We use granular data on GVC at the sector level to document empirical evidence in favor of this prediction.
Length: 61 pages
Creation-Date: 2020-04
File-URL: https://www.bis.org/publ/work860.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work860.htm
File-Format: text/html
Number: 860
Classification-JEL: E2, E5, E6
Keywords: dollar invoicing, exchange rates, monetary policy, global value chains
Handle: RePEc:bis:biswps:860