NBER Working Paper No. 13820
Issued in February 2008
NBER Program(s):   IFM    ITI    ME

---- Abstract -----

The U.S. dollar holds a dominant place in the invoicing of international trade, along two complementary dimensions. First, most U.S. exports and imports invoiced in dollars. Second, trade flows that do not involve the United States are also substantially invoiced in dollars, an aspect that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that even though exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal policy.

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Linda S. Goldberg
Research Department, 3rd Floor
Federal Reserve Bank-New York
33 Liberty Street
New York, NY 10045
and NBER
linda.goldberg@ny.frb.org
Cédric Tille
Graduate Institute for International
and Development Studies
Department of Economics
University of Geneva
Pavillon Rigot, Avenue de la Paix 11 A
1202 Geneve, Switzerland
tille@hei.unige.ch