Currency Quandary: The Choice of Invoicing Currency under Exchange-Rate Uncertainty |
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Authors: | Martin Johnson,& Daniel Pick |
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Affiliation: | Industry Commission, Locked Bag 2, Collins St. East, 45 Collins Street, Melbourne, Victoria 3000, Australia,;U.S. Department of Agriculture, Economic Research Service, 1301 New York Avenue, N.W., Washington D.C. 20005, USA |
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Abstract: | Recent studies have derived optimal invoicing strategies for an exporting firm when exchange rates are uncertain. However, these studies fail to explain trade transacted in a third currency (vehicle currency). In this study, we extend existing models to include the possibility that trade occurs in a vehicle currency. We find that under conditions stipulated by existing models, vehicle-currency invoicing is not preferred. The presence of a competing exporter under imperfect competition, however, can induce vehicle-currency pricing. This is consistent with trade in many primary commodities dominated by few exporters with many importers but where commodities are not perfectly homogeneous. |
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