Dollar invoicing, global value chains, and the business cycle dynamics of international trade

BIS Working Papers  |  No 860  | 
28 April 2020


This paper studies how US dollar invoicing and the rise of global value chains (GVCs) affects the relationship between monetary policy, exchange rates and international trade.


We build a three-country dynamic stochastic general equilibrium (DSGE) model where two small open economies trade with each other as well as with a large global economy (representing the United States). All the economies export final goods to each other. In addition, the two small economies operate a GVC by exporting intermediate goods to one another that are processed further before shipping the final product to the US. We study how different segments of international trade (final goods vs GVCs) react to exchange rate movements triggered by monetary shocks. We test the predictions of the model using a granular decomposition of bilateral trade flows into the source, intermediate and final destinations of value added.


In response to both domestic and foreign shocks, the model has notably different implications for final goods trade, on the one hand, and GVC-oriented trade, on the other. For example, in response to a US monetary contraction and dollar appreciation, final goods trade between non-US countries declines by more than the GVC trade that services US final demand. The evidence in favour of the main predictions of the model is ambiguous when we consider only a coarse classification between final and intermediate goods trade that is available in standard databases. However, we find much stronger evidence for the model once we use input-output data to generate measures that capture GVC activity more accurately. These findings highlight the importance of acknowledging GVCs in economic modelling, data collection efforts and empirical investigations.


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. 

JEL classification: E2, E5, E6

Keywords: dollar invoicing, exchange rates, monetary policy, global value chains