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Currency Quandary: The Choice of Invoicing Currency under Exchange‐Rate Uncertainty
Author(s) -
Johnson Martin,
Pick Daniel
Publication year - 1997
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00044
Subject(s) - currency , economics , imperfect competition , homogeneous , exchange rate , monetary economics , imperfect , international economics , competition (biology) , microeconomics , ecology , linguistics , philosophy , physics , biology , thermodynamics
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.