Macroeconomic Interdependence and the International Role of the Dollar
39 Pages Posted: 10 Jun 2008
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Macroeconomic Interdependence and the International Role of the Dollar
Macroeconomic Interdependence and the International Role of the Dollar
Date Written: February 2008
Abstract
The U.S. dollar holds a dominant place in the invoicing of international trade, along two complementary dimensions. First, most U.S. exports and imports invoiced in dollars. Second, trade flows that do not involve the United States are also substantially invoiced in dollars, an aspect that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that even though exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal policy.
Keywords: center-periphery, exchange rate pass-through, invoicing, monetary policy
JEL Classification: F41, F42
Suggested Citation: Suggested Citation
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