Currency Quandary: The Choice of Invoicing Currency Under Exchange Rate Uncertainty
REVIEW OF INTERNATIONAL ECONOMICS
Posted: 10 Oct 1996
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 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.
JEL Classification: F31, F12
Suggested Citation: Suggested Citation