GEP 14/11: Imported Inputs and Invoicing Currency Choice: Theory and Evidence from UK Transaction Data

Summary

This paper considers in theory and data how exporters' dependence on imported inputs affects their choice of invoicing currency.

Abstract

What determines the currency denomination of international trade? This is the first paper to consider in theory and data how exporters' dependence on imported inputs affects their choice of invoicing currency. My model predicts that exporters more dependent on foreign currency-denominated inputs are more likely to use foreign currency for pricing. Using a novel dataset that covers all UK trade transactions with non-EU countries, I provide firm-level evidence by matching import and export data and relate exporters' invoicing currency choice to their import behavior. I find considerable support for the model's predictions, and these findings have strong implications for the variation of exchange rate pass-through across industries.

Download the paper in PDF format

Authors

Wanyu Chung

View all GEP discussion papers | View all School of Economics featured discussion papers