IMF Working Papers

Bilateral Trade in Services and Exchange Rates: Evidence of Dominant Currency Pricing

By Nan Li, Sergii Meleshchuk

November 22, 2024

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Format: Chicago

Nan Li, and Sergii Meleshchuk. "Bilateral Trade in Services and Exchange Rates: Evidence of Dominant Currency Pricing", IMF Working Papers 2024, 242 (2024), accessed November 23, 2024, https://doi.org/10.5089/9798400295928.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper estimates, for the first time, the exchange rate elasticity of bilateral trade in services, providing indirect evidence of both producer currency pricing and dominant currency pricing in services trade. We developed a novel dataset of bilateral trade flows in services, covering twelve broad service sectors across 245 countries from 1985 to 2022. We find that, similar to manufacturing trade, the value of services trade is more closely associated with US dollar exchange rates than with bilateral exchange rates, although this relationship varies by service category. Zeroing in on tourism, where proxies for trade volume (such as tourist arrivals and hotel stays) are available, we find that bilateral exchange rates play a larger role on tourism volume compared to the dollar exchange rates. In addition, in the context of global supply chain, we find that downstream dollar exchange rate movements, rather than downstream bilateral exchange rates, affect the demand for service imports via forward linkages.

Subject: Currencies, Exchange rate adjustments, Exchange rates, Exports, Foreign exchange, Imports, International trade, Money, Plurilateral trade, Service exports, Trade balance, Trade in goods, Trade in services

Keywords: Currencies, Dominant currency pricing, Exchange rate adjustments, Exchange rates, Exchange rates, Exports, Global, Global value chain, Imports, Plurilateral trade, Producer currency pricing, Sectoral analysis, Service exports, Trade balance, Trade in goods, Trade in services, Trade in services

Publication Details

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