Dominant currency paradigm†

We propose a “dominant currency paradigm” with three key features: dominant currency pricing, pricing complementarities, and imported inputs in production. We test this paradigm using a new dataset of bilateral price and volume indices for more than 2,500 country pairs that covers 91 percent of world trade, as well as detailed firm-product-country data for Colombian exports and imports. In strong support of the paradigm we find that (i) noncommodities terms-of-trade are uncorrelated with exchange rates; (ii) the dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions, and this effect is increasing in the share of imports invoiced in dollars; (iii) US import volumes are significantly less sensitive to bilateral exchange rates, compared to other countries’ imports; (iv) a 1 percent US dollar appreciation against all other currencies predicts a 0.6 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. We characterize the transmission of, and spillovers from, monetary policy shocks in this environment

Exogenous uncertainty and the identification of Structural Vector Autoregressions with external instruments

We provide necessary and sufficient conditions for the identification of Structural Vector Autoregressions (SVARs) with external instruments, considering the case in which r instruments are used to identify g structural shocks of interest, r>=g>=1. Novel frequentist estimation methods are discussed by considering both a partial shocks identification strategy, where only g structural shocks are of interest and are instrumented, and in a full shocks identification strategy, where despite g structural shocks are instrumented, all n structural shocks of the system can be identified under certain conditions. The suggested approach is applied to empirically investigate whether financial and macroeconomic uncertainty can be approximated as exogenous drivers of U.S. real economic activity, or rather as endogenous responses to first moment shocks, or both. We analyze whether the dynamic causal effects of non-uncertainty shocks on macroeconomic and financial uncertainty are signicant in the period after the Global Financial Crisis

Dominant currency paradigm†

We propose a “dominant currency paradigm” with three key features: dominant currency pricing, pricing complementarities, and imported inputs in production. We test this paradigm using a new dataset of bilateral price and volume indices for more than 2,500 country pairs that covers 91 percent of world trade, as well as detailed firm-product-country data for Colombian exports and imports. In strong support of the paradigm we find that (i) noncommodities terms-of-trade are uncorrelated with exchange rates; (ii) the dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions, and this effect is increasing in the share of imports invoiced in dollars; (iii) US import volumes are significantly less sensitive to bilateral exchange rates, compared to other countries’ imports; (iv) a 1 percent US dollar appreciation against all other currencies predicts a 0.6 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. We characterize the transmission of, and spillovers from, monetary policy shocks in this environment