The International Price System
Gita Gopinath
Harvard
Paper prepared for Jackson Hole Symposium 2015
1 / 27
International Linkages: Consensus Policy View
1
Nominal Exchange Rates and Inflation
2
Nominal Exchange Rates and Trade Balance
2 / 27
International Linkages: Consensus Policy View
1
Nominal Exchange Rates and Inflation
• Depreciations (appreciations) are inflationary (deflationary)
P M = Eh/f P̄ff
2
Eh/f ↑, P M ↑
Nominal Exchange Rates and Trade Balance
2 / 27
International Linkages: Consensus Policy View
1
Nominal Exchange Rates and Inflation
• Depreciations (appreciations) are inflationary (deflationary)
P M = Eh/f P̄ff
2
Eh/f ↑, P M ↑
Nominal Exchange Rates and Trade Balance
• Depreciations (appreciations) improve (deteriorate) trade
balance, if demand sufficiently elastic.
TOT ≡
PX
P̄hh
=
PM
Eh/f P̄ff
Eh/f ↑, TOT ↓
2 / 27
International Linkages: Consensus Policy View
1
Nominal Exchange Rates and Inflation
• Depreciations (appreciations) are inflationary (deflationary)
P M = Eh/f P̄ff
2
Eh/f ↑, P M ↑
Nominal Exchange Rates and Trade Balance
• Depreciations (appreciations) improve (deteriorate) trade
balance, if demand sufficiently elastic.
TOT ≡
PX
P̄hh
=
PM
Eh/f P̄ff
Eh/f ↑, TOT ↓
• Fleming (1962), Mundell (1963), Dornbusch (1976), Svenson
& van Wijnbergen (1989), Obstfeld & Rogoff (1995)
2 / 27
3 / 27
Publications using BLS IPP data
1 “The International Price System,” Forthcoming Jackson Hole Symposium
Proceedings, 2015.
2 Ariel Burstein and Gita Gopinath. “International Prices and Exchange
Rates,” in Gopinath, G., Helpman, E., and Rogoff, K. (Eds.): Handbook
of International Economics, Volume 4, 2014. Amsterdam: Elsevier
3 Gita Gopinath, Oleg Itskhoki and Brent Neiman. Trade Prices and the
Global Trade Collapse of 2008-09,” IMF Economic Review, September
2012, Volume 60(12)
4 Gita Gopinath and Oleg Itskhoki. “In Search of Real Rigidities,” NBER
Macroeconomics Annual, 2010, Volume 25.
5 Gita Gopinath and Oleg Itskhoki. “Frequency of Price Adjustment and
Pass- through,?” Quarterly Journal of Economics, May 2010, Volume
125(2).
6 Gita Gopinath, Oleg Itskhoki and Roberto Rigobon. “Currency Choice
and Exchange Rate Pass-through,?” American Economic Review, March
2010, Vol- ume 100(1).
7 Gita Gopinath and Roberto Rigobon. “Sticky Borders,” Quarterly Journal
of Economics, May 2008, Volume 123(2)
4 / 27
International Linkages
• The International Price System
1
Dominance of dollar invoicing∗ in world trade.
2
International prices, in their currency of invoicing, are not very
sensitive to exchange rates at horizons of up to two years.
5 / 27
International Linkages
• The International Price System
1
Dominance of dollar invoicing∗ in world trade.
2
International prices, in their currency of invoicing, are not very
sensitive to exchange rates at horizons of up to two years.
• Inflation
M
PUS
= P̄ $
|{z}
insulated
M
PROW
= EROW /$ P̄ $
| {z }
sensitive
5 / 27
International Linkages
• The International Price System
1
Dominance of dollar invoicing∗ in world trade.
2
International prices, in their currency of invoicing, are not very
sensitive to exchange rates at horizons of up to two years.
• Inflation
M
PUS
= P̄ $
|{z}
M
PROW
= EROW /$ P̄ $
| {z }
sensitive
insulated
• Terms of Trade
P̄h$
TOT
=
| {z } P̄ $
f
stable
5 / 27
International Linkages
• The International Price System
1
Dominance of dollar invoicing∗ in world trade.
2
International prices, in their currency of invoicing, are not very
sensitive to exchange rates at horizons of up to two years.
• Inflation
M
PUS
= P̄ $
|{z}
M
PROW
= EROW /$ P̄ $
| {z }
sensitive
insulated
• Terms of Trade
P̄h$
TOT
=
| {z } P̄ $
f
stable
• Devereux, Engel & Tille (2003), Corsetti & Pesenti (2005)
*currency in which an invoice for exported or imported goods is denominated. (Non-commodities)
5 / 27
Road Map
• Illustration using three countries
• Empirical evidence for IPS (35 countries)
• Dollar dominance
• Low sensitivity to ER’s
• Empirical evidence for IPS using BLS IPP data
• Policy Implications
6 / 27
A Tale of Three Countries
.3
.4
.5
PASS-THROUGH
.6
.7
.8
.9
1
1.1
ER Pass-through into Import Prices
1
2
3
4
5
HORIZON (Quarters)
Turkey
∆ipin,t = αn +
PT
k=0
βn,k ∆en,t−k +
ERPT
One quarter
Eight quarter
Foreign Invoicing
6
Japan
PT
k=0
Turkey
93%
100%
97%
7
8
United States
γn,k ∆ppin,t−k + εn,t ,
Japan
83%
90%
76%
T =8
US
34%
44%
7%
7 / 27
Road Map
• Illustration using three countries
• Empirical evidence for IPS (35 countries)
• Dollar dominance
• Low sensitivity to ER’s
• Macro and micro implications of IPS: Casas, Diez, Gopinath,
Gourinchas (2015)
8 / 27
Data
• Import Price Index and Producer Price Index data
• Construct trade weighted exchange rates and trade weighted
PPI
• Bilateral trade flows: IMF’s Direction of Trade Statistics data
base
• Currency invoicing
• Customs agencies, central banks, other statistical agencies
• Kamps (2006), Chinn & Ito (2014)
• BLS confidential import and export price data
• I-O tables to measure import content in consumption
9 / 27
IPS Definition 1: Dominance of dollar invoicing in world trade
• Covers 55% of imports, 57% of exports. Averages post 1999.
• Dollar invoicing share: 4.7 times its share in world imports, 3.1 times its
share in world exports.
• Euro invoicing share: 1.2 times for imports and exports.
• Goldberg (2013), Goldberg and Tille (2009), Ito and Chinn (2013)
10 / 27
IPS Definition 1: Dominance of dollar invoicing in world trade
0
0
.2
.2
.4
Share
.4
Share
.6
.6
.8
.8
1
Invoicing shares and GDP per capita
AU BE BR CA CO CY CZ DE EE FR GR HU ID IL IN IS IT JP LV
Dollar
U.S. Trade
CH ES LU MT NL NO PK PL PT RO SE SI TH TR UA UK
Dollar
U.S. Trade
Figure : Dollar Dominance in World Trade: By Country
11 / 27
IPS Definition 1: Dominance of dollar invoicing in world trade
Country
United States
Italy*
Germany*
Spain*
France*
United Kingdom
Australia
Switzerland
Norway
Sweden
Japan
Canada
Poland
Iceland
Thailand
Israel
Turkey
South Korea
Brazil
Indonesia
India
Imports
0.93
0.58
0.55
0.54
0.45
0.32
0.31
0.31
0.30
0.24
0.23
0.20
0.06
0.06
0.04
0.03
0.03
0.02
0.01
0.01
0.00
Exports
0.97
0.61
0.62
0.58
0.50
0.51
0.20
0.35
0.03
0.39
0.39
0.23
0.04
0.05
0.07
0.00
0.02
0.01
0.01
0.00
0.00
12 / 27
IPS Definition 1: Dominance of dollar invoicing in world trade
Invoicing shares and GDP per capita
TH
KR IL
IS
CZ
CA
JP SE
AU CHNO
UK
MTCY
EE GR ES
NL
IT
PT
SI
SK
DE
FR
BE
PKIN
1
BG
LV
COROTR
BRAR
LT
HU
PL
IDUA
TH
BG
COROTR
BRAR
HU
PL
KR IL
IS
CZ
Foreign Currency Invoicing Share
.2
.4
.6
.8
IDUA
Foreign Currency Invoicing Share
.2
.4
.6
.8
1
PKIN
LU
CA
JP SE
AU CHNO
UK
0
US
0
US
7
8
9
10
Log GDP Per Capita
(a) Imports
11
12
7
8
9
10
Log GDP Per Capita
11
12
(b) Imports, Ex-Euro
13 / 27
IPS Definition 1: Dominance of dollar invoicing in world trade
Invoicing shares and GDP per capita
NO
IS
CA
ZA
JP
GR
AU
CH
SE
UK
ES
NL
8
MY
AR
IDUA DZ BG
CORO
BRHU
TR
PL
TH
9
10
Log GDP Per Capita
(c) Exports
DE
IT FR
BE
NO
IS
CA
ZA
JP
AU
CH
SE
UK
LU
AT
US
11
KR IL
CZ
US
0
0
SKPT
SI
7
PKIN
1
KR IL
CZ
Foreign Currency Invoicing Share
.2
.4
.6
.8
MY
LV
AR
IDUA DZ BG
CORO
BRHU
TR
PL
LT
TH
Foreign Currency Invoicing Share
.2
.4
.6
.8
1
PKIN
12
7
8
9
10
Log GDP Per Capita
11
12
(d) Exports, Ex-Euro
14 / 27
2015
.9
2000
2005
2010
Iceland
2015
2000
2005
2010
Norway
2015
1995
2000 2005 2010
United States
2015
.6
2000 2005 2010
South Korea
2015
1995
2000
2015
.3
.6
.9
1995
0
0
.3
.6
.9
0
.3
.6
0
.3
.6
.3
0
0
.3
.6
.9
1970 1980 1990 2000 2010
Japan
1990 1995 2000 2005 2010 2015
Indonesia
.9
2005 2010
Australia
.9
2000
.9
1995
0
.3
.6
.9
.6
.3
0
0
.3
.6
.9
IPS Definition 1a: Relative Stability of invoicing patterns over time
1995 2000 2005 2010 2015
Thailand
2005 2010
Turkey
Figure : Fraction Priced in Foreign Currency
15 / 27
IPS Definition 2a: Countries with high SRPT have high LRPT
• Dynamic Lag Regression
∆ipin,t
T
T
X
X
= αn +
βn,k ∆en,t−k +
γn,k ∆ppin,t−k +εn,t ,
k=0
T =8
k=0
• Cumulative Pass-through, PTn,m ≡
Pm
k=0 βn,k
PTn,m = γ + ηPTn,1 + εn,m ,
m = 4, 8
• Start date 1990, 40 quarters at least, IP excluding petroleum
for U.S.
• VECM, Generated regressor bias
•
Burstein and Gopinath (2014)
16 / 27
1.1
IPS Definition 2a: Countries with high SRPT have high LRPT (4 quarter)
DE
FOUR QUARTER
.5
.8
IE
JP
CA
AU
NO NZ
IL
CO
LV CZHU
DK
UKVE
EE
NL
IT
BR
SE
KR
TR
MX
AR
OLS
TH
SG
Bootstrap
Mean
5th-pctile
95th-pctile
S.D.
PK
ZA
.2
US
CH
FR HK
FI
Four Quarter
Slope Intercept
0.921
0.053
(0.11)
(0.07)
0.84
0.57
1.19
0.23
0.13
-0.08
0.32
0.15
ES
(R 2 = 0.68, N = 35)
PH
.2
.5
.8
1.1
ONE QUARTER
∆ipin,t = αn +
PT
k=0
βn,k ∆en,t−k +
PT
k=0
γn,k ∆ppin,t−k + εn,t ,
T =8
PTn,4 = γ + ηPTn,1 + εn,4
17 / 27
1.1
IPS Definition 2a: Countries with high SRPT have high LRPT (8 quarter)
DE
EIGHT QUARTER
.5
.8
EE
NO
LV
IT
CO
SE UK
CZ
OLS
Eight Quarter
Slope Intercept
0.871
0.102
(0.14)
(0.10)
PK
KR
IL
DK
VE
NL
CHUS
BR TR
SG MX
JP
AR
NZAU
CA
IE
Bootstrap
Mean
5th-pctile
95th-pctile
S.D.
TH
ZA
HU
ES
0.708
0.33
1.11
0.27
0.250
0.00
0.52
0.18
.2
(R 2 = 0.53, N = 35)
FR HK
PH
FI
.2
.5
.8
1.1
ONE QUARTER
PTn,8 = γ + ηPTn,1 + εn,8
18 / 27
IPS Definition 2b: Countries with higher shares of imports invoiced in a foreign
1.1
currency have higher short-run and long-run pass-through
.8
Fracforeign
1 QUARTER
.5
AU
JP
CA
TRAR
TH
BR
PK
ILKR
N
R2
1 Quarter
0.70
(0.16)
20
0.51
NO
UK
SE
US
NL
HUCO
CZ
CH
.2
FR
.2
.5
.8
FOREIGN CURRENCY SHARE
1.1
19 / 27
IPS Definition 2b: Countries with higher shares of imports invoiced in a foreign
1.1
1.1
currency have higher short-run and long-run pass-through
TR
BR
JP
TH
ILCO
PK
KR
CZHU
UK
UK
US
.2
NL
FR
CH
FR
.2
AR
PK
CO
KR
CZ IL
TH
CH
HU
.2
NL
US
SE
TR
BR
.5
SE
.5
AU
NO
8 QUARTER
4 QUARTER
.8
AU
NO
CA
AR
.8
JP
CA
.5
.8
FOREIGN CURRENCY SHARE
Fracforeign
N
R2
1.1
4 Quarter
0.57
(0.18)
20
0.34
.2
.5
.8
FOREIGN CURRENCY SHARE
1.1
8 Quarter
0.40
(0.18)
20
0.17
20 / 27
Detailed Evidence from the U.S.
1
US BLS price surveys, 1994.M1-2014.M6.
• Gopinath, Itskhoki, Rigobon (2010)
2
Prices, as opposed to unit values
3
Exclude intra-firm transactions
4
Can condition on a price change
21 / 27
Detailed Evidence from the U.S.
0
.2
PASS-THROUGH
.4
.6
.8
1
1.2
US BLS price surveys, 1994.M1-2014.M6, Gopinath, Itskhoki, Rigobon (2010)
1
6
DOLLAR
12
HORIZON
NON DOLLAR
18
24
ALL
Figure : Aggregate ERPT by Currency
22 / 27
Switzerland
Italy
UK
.9
.3
.6
.6
.3
0
0
0
0
.3
.3
.6
.6
.9
.9
.9
1.2
1.2
1.2
1.2
Germany
13
17
21
25
1
5
9
13
17
21
25
1
5
9
France
17
21
25
1
5
1.2
13
17
21
25
21
25
21
25
1
5
9
13
17
21
25
0
0
0
0
.3
.3
.3
.6
.6
9
Belgium
.9
.9
.9
.6
.3
13
Spain
1.2
1.2
Japan
1.2
9
.9
5
.6
1
1
5
13
17
21
25
1
5
Sweden
9
13
17
21
25
1
5
Canada
9
13
17
Austria
.9
0
0
.3
.6
0 .3 .6 .9 1.2
.3
.6
.9
0 .3 .6 .9 1.2
1.2
1.2
Netherlands
9
1
5
9
13
17
21
25
1
5
9
13
17
21
25
1
5
9
13
17
21
25
1
5
9
13
17
Figure : Aggregate ERPT by Currency by Country
23 / 27
IPS Definition 2c: Border prices, in whatever currency they are set in, respond
partially to exchange rate shocks even conditional on a price change
go
PT Conditional on Price Change
D
ND
All
Germany
Switz.
Italy
UK
France
Spain
Diff.
10 HS
0.26
0.32
0.21
0.24
0.23
0.19
0.21
0.21
0.27
0.85
0.85
0.67
0.76
0.77
0.72
0.76
0.93
0.88
Sufficient statistic for currency choice
24 / 27
IPS Definition 2c: Border prices, in whatever currency they are set in, respond
partially to exchange rate shocks even conditional on a price change
go
PT Conditional on Price Change
D
ND
All
Germany
Switz.
Italy
UK
France
Spain
Diff.
10 HS
0.26
0.32
0.21
0.24
0.23
0.19
0.21
0.21
0.27
0.85
0.85
0.67
0.76
0.77
0.72
0.76
0.93
0.88
Life-long PT
D
ND
All
0.47
1.01
Diff.
0.39
0.98
Sufficient statistic for currency choice
24 / 27
International Price System
go
Endogenous currency choice: Price in a currency in which ‘desired’
prices are most stable
• Strategic complementarity in pricing
• Demand systems: Kimball (1995), Melitz and Ottaviano
(2008), Bergin and Feenstra (2001)
• GIR(2010): Homogenous (differentiated) goods prices in
dollars (foreign currency)
• Imported input costs
• Chung (2014)
25 / 27
International Price System
go
Endogenous currency choice: Price in a currency in which ‘desired’
prices are most stable
• Strategic complementarity in pricing
• Demand systems: Kimball (1995), Melitz and Ottaviano
(2008), Bergin and Feenstra (2001)
• GIR(2010): Homogenous (differentiated) goods prices in
dollars (foreign currency)
• Imported input costs
• Chung (2014)
• Can explain
• Why SR and LRPT are similar
• Link between invoicing choices and PT
• Why dollar dominance hard to break
25 / 27
International Price System
go
Endogenous currency choice: Price in a currency in which ‘desired’
prices are most stable
• Strategic complementarity in pricing
• Demand systems: Kimball (1995), Melitz and Ottaviano
(2008), Bergin and Feenstra (2001)
• GIR(2010): Homogenous (differentiated) goods prices in
dollars (foreign currency)
• Imported input costs
• Chung (2014)
• Can explain
• Why SR and LRPT are similar
• Link between invoicing choices and PT
• Why dollar dominance hard to break
• Cannot be the full story: fixed costs important
25 / 27
Policy Implications
1
Inflation Stabilization
InflationCPI = (Import Content) · (Import Pass-through)
26 / 27
Policy Implications
1
Inflation Stabilization
InflationCPI = (Import Content) · (Import Pass-through)
• Following a 10% depreciation
US
Import Content
0.12
InflationCPI
0.4 – 0.7
Japan
0.12
0.8 – 1.3
Mexico
0.15
1.38 – 1.59
Turkey
0.18
1.65 - 2.03
26 / 27
Policy Implications
1
Inflation Stabilization
InflationCPI = (Import Content) · (Import Pass-through)
• Following a 10% depreciation
US
Import Content
0.12
InflationCPI
0.4 – 0.7
Japan
0.12
0.8 – 1.3
Mexico
0.15
1.38 – 1.59
Turkey
0.18
1.65 - 2.03
• Dollar appreciations:
• Unlikely major disinflationary concern for US.
• More significant inflationary concerns for a country like Turkey.
26 / 27
Policy Implications
1
Inflation Stabilization
InflationCPI = (Import Content) · (Import Pass-through)
• Following a 10% depreciation
US
Import Content
0.12
InflationCPI
0.4 – 0.7
Japan
0.12
0.8 – 1.3
Mexico
0.15
1.38 – 1.59
Turkey
0.18
1.65 - 2.03
• Dollar appreciations:
• Unlikely major disinflationary concern for US.
• More significant inflationary concerns for a country like Turkey.
• Asymmetric monetary policy spillovers (parallel with asset
markets)
26 / 27
Policy Implications
2
Export Competitiveness: quantities versus mark-ups
• Do depreciations (appreciations) make exports cheaper
(expensive)?
• For the U.S., Yes
• For most others, No: Mainly fluctuations in mark-ups (profits)
• Japan: 33% of exports invoiced in yen.
• PT into dollar prices even conditional on a price change for
these goods is 23%
3
Internationalization of Currencies: chinese yuan
• Added benefit of insulating domestic inflation from external
shocks.
4
Special Drawing Rights: more symmetry
• Bring greater symmetry in policy spillovers.
• To be privately optimal, will need a large number of importers
and exporters to price in SDRs.
27 / 27