Imported inputs and invoicing currency choice: Theory and evidence from UK transaction data

Abstract

A signi…cant proportion of international trade is in intermediate goods. This paper considers theoretically and empirically how exporters' dependence on imported inputs a¤ects their choice of invoicing currency. The model predicts that exporters that depend more on foreign currency-denominated inputs are less likely to price in their home currency. I test this and other theoretical results using a novel dataset that covers UK trade transactions with non-EU countries. I …nd considerable support for the model's predictions. A 10 percentage point higher share of foreign currency-denominated inputs is associated with a 20 percentage point higher probability of pricing in the same foreign currency relative to the producer's currency.JEL Classi…cation: F1, F31, F41.

Strategic Currency Choice in International Trade

“…The first microeconomic determinant brought up in works of Novy (2006); Goldberg & Tille (2008b); Chung (2015) is the intra-firm hedging behavior. Firms that use imported inputs use more non-domestic currencies than the ones that produce only from domestic resources.…”

“…The closest research to this paper would be the papers by Chung (2015) and (Devereux et al , 2015). The former concentrates on the role of intermediate inputs in firm-level currency choice, the latter asks a question how market shares of the firms -both the exporters and importers effects the exchange rate pass through and choice of currency.…”

“…Some recent survey studies on currencies in international trade (Ito et al , 2010;Friberg & Wilander, 2008) established that VCP is more dominant than anticipated by the theory. The research of Goldberg & Tille (n.d.) and Goldberg & Tille (2008a) formulated the overall framework to asses the main determinants of the currency choice in international trade and, separately, a model that embraces the contractual nature of currency choice decision in international trade.The monopolistic competition model of Devereux et al (2015), and research of Chung (2015) concentrate on the production-chain aspect of currency choice decision.…”

“…7 In this paper I present a unique three-choice test on the firm-level data, which up to my knowledge, has never been done before. Till present moment both economic theory and empirics -with the notable exception of (Goldberg & Tille, 2008a,b;Chung, 2015) -was either limited to considering a two-choice models, where only the currencies of the trading partners have been at the question, or was overlooking the microeconomic and bargaining motivations.…”

How does import processing time impact export patterns?

“…These studies found that firms with past experiences in exporting also tend to initiate importing activities, because particular sunk costs are shared between importing and exporting. This literature may also include Amiti, Itskhoki, and Konings () and Chung (). Although the former study examined the relationship between import intensity and exchange rate pass‐through in exporting, the latter revealed that exporters' dependence on imported inputs affects their choice of invoice currency when exporting.…”