Fundamentals vs. policies: can the US dollar's dominance in global trade be dented?

Cédric Tille, Arnaud Mehl, Georgios Georgiadis and Helena Le Mezo

No 16303, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The US dollar plays a dominant role in the invoicing of international trade, albeit not an exclusive one as more than half of global trade is invoiced in other currencies. Of particular interest are the euro, with a large role, and the renminbi, with a rising role. These two currencies are well suited to contrast the roles of economic fundamentals and policies, as European policy makers have taken a neutral stance in contrast to the promotion of the international role of the renminbi by the Chinese authorities. We assess the drivers of invoicing using the most recent and comprehensive data set for 115 countries over 1999-2019. We find that standard mechanisms that foster use of a large economy's currency predicted by theory|i.e. strategic complementarities in price setting and integration in cross-border value chains|underpin use of the dollar and the euro for trade with the United States and the euro area. These mechanisms also support the role of the dollar, but not the euro, in trade between non-US and non-euro area countries, making the dollar the globally dominant invoicing currency. Fundamentals and policies have played a contrasted role for the use of the renminbi. We find that China's integration into global trade has further strengthened the dominant status of the dollar at the expense of the euro. At the same time, the establishment of currency swap lines by the People's Bank of China has been associated with increases in renminbi invoicing, with an adverse effect on dollar use that is larger than for the euro.

Keywords: International trade invoicing; Dominant currency paradigm; Markets vs. policies (search for similar items in EconPapers)
JEL-codes: F14 F31 F44 (search for similar items in EconPapers)
Date: 2021-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP16303 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Fundamentals vs. policies: can the US dollar’s dominance in global trade be dented? (2021)
Working Paper: Fundamentals vs. policies: can the US dollar’s dominance in global trade be dented? (2021)
Working Paper: Fundamentals vs. policies: can the US dollar's dominance in global trade be dented? (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:16303

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP16303

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().