A.2

Dominant currency pricing in international trade of services

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Thursday, April 25, 2024
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Abstract

Key Points: 
    • Abstract
      We analyze, for the first time, how firms choose the currency in which they price transactions
      in international trade of services and investigate, using direct evidence, whether the US dollar
      (USD) plays a dominant role in services trade.
    • JEL: F14, F31, F41
      Keywords: dominant currency paradigm, international trade, services.
    • Related research has
      shown that the US dollar (USD) exchange rate is a major source of swings in
      global trade in goods?a ?dominant currency pricing? (DCP) phenomenon?since
      most goods traded internationally are invoiced and sticky in USD.
    • Yet it is also key to look at dominant currency pricing in international trade
      in services for several reasons.
    • First, global trade in services is big?accounting for
      about a quarter of global gross trade flows and for around 40% in terms of valueadded trade.
    • Third, and relatedly, the
      future of globalisation might be in trade in intermediate services?as progress with
      digitech lowers technological barriers to such trade across borders.
    • But perhaps the main reason is that trade in services is conceptually different
      from trade in goods.
    • Our paper is the first, to our best knowledge, that analyzes how firms choose
      the currency in which they price transactions in international trade of services and
      that examines whether dominant currency pricing differs between trade in goods
      and services using direct evidence? hitherto unavailable?on patterns of currency
      choices in international transactions in services compared to goods.
    • Work on dominant currency pricing has
      almost exclusively focused on trade in goods.
    • One reason is that data on patterns
      in invoicing currency for trade in services are ?virtually nonexistent? (Adler et al.
    • Yet it is important to look at dominant currency pricing in international trade
      in services for several reasons.
    • Using the exporter?s (or producer) currency in exports is known in the literature as producer
      currency pricing (PCP), while using the importer?s currency is known as local currency pricing (LCP)
      and using a third currency is known as vehicle currency pricing (VCP).
    • Our paper is the first, to our best knowledge, that analyzes how firms choose the
      currency in which they price transactions in international trade of services and that
      examines whether dominant currency pricing differs between international trade in
      goods and services using direct evidence ? hitherto unavailable ? on patterns of
      currency choices in international transactions in services compared to goods.
    • First,
      we rule out compositional effects, that is that differences in the use of currencies
      reflect differences in trade partners in services vs. goods trade.
    • Both in extra-EU and intra-EU trade, the EUR is the
      most widely used currency, be it on the export or import side.
    • Based
      on the framework, we stress which factors should determine currency choices in
      international trade, and to what extent one should expect differences between
      services trade and goods trade.
    • Second, it can price in the importer?s currency
      (local currency pricing, LCP).4 Third, it can use a third currency, say currency
      v (vehicle currency pricing, VCP).
    • That is,
      the currency choice problem is equivalent to determining the currency in which the
      desired price is least volatile.
    • (2022)
      provide systematic empirical evidence ? firm size and exposure to foreign currencies
      in imported inputs ? should also shape currency choices in services trade.
    • Dominant currency pricing in USD ? services vs. goods trade
      Having established that currency choice in international trade of services is an
      active firm-level decision as well as the determinants of this decision, we now

      8.

    • Services and goods exports: prevalence of different pricing strategies (percent)
      Notes: The table shows the shares (in value terms) of different pricing strategies: producer currency
      pricing (PCP), local currency pricing (LCP) and vehicle currency pricing (VCP).
    • To make comparisons with goods trade, we rely on Eurostat?s
      macro data on international trade in goods by invoivcing currency.
    • If intra-EU trade is more important in services than
      in goods trade, this could hence be an explanation for the lower prevalence of the
      USD in services trade.
    • We showed
      that while the USD is also extensively used as a vehicle currency in services trade, its
      prevalence is systematically lower than in goods trade.
    • Hence for all travel services exports
      the invoicing currency is the EUR; for travel imports it is the currency of the
      destination of travel (i.e.
    • Also for these

      ECB Working Paper Series No 2932

      33

      services it seems plausible that trade does not take place vis-?-vis all counterparts
      in each currency.

    • Figure B.2: Share of international trade in services in global GDP broken down by type (%)
      Notes: Authors? calculations using World Bank and World Trade Organization data.
    • An earlier version of this paper circulated under the title ?Currency choices and the role of the
      U.S. dollar in international services trade?.

Nowcasting consumer price inflation using high-frequency scanner data: evidence from Germany

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Tuesday, April 23, 2024
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Key Points: 

    Business as usual: bank climate commitments, lending, and engagement

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    Tuesday, April 2, 2024
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    Key Points: 

      Managing the transition to central bank digital currency

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      Wednesday, February 14, 2024
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      Key Points: 

        Demographics, labor market power and the spatial equilibrium

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        Tuesday, February 13, 2024
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        Abstract

        Key Points: 
          • Abstract
            This paper studies how demographics affect aggregate labor market power, the urban wage
            premium and the spatial concentration of population.
          • I develop a quantitative spatial model
            in which labor market competitiveness depends on the demographic composition of the local
            workforce.
          • If these factors differ across workers, labor market power has a role to
            play in explaining wage inequality.
          • This paper contributes to the literature on differences in labor market power by analyzing a
            new dimension of heterogeneity: demographics.
          • Since older workers are less mobile in terms of
            switching workplaces, firms have more labor market power over older workers.
          • I start by estimating labor market power by measuring the sensitivity of worker turnover to
            the wage paid.
          • I find a strong
            role of demographics in determining the degree of labor market power enjoyed by firms.
          • Next, I provide evidence of the importance of differences in labor market power for spatial
            wage inequality.
          • To explore the consequences of labor market sorting, I build a spatial general equilibrium
            model in which labor market competitiveness depends on the demographic composition of the

            ECB Working Paper Series No 2906

            2

            local workforce.

          • If these factors differ across workers, labor market power has a role to
            play in explaining wage inequality.
          • In
            the model, geographic sorting by age matters and leads to higher labor market power in rural
            areas, which implies an urban wage premium that is 4% larger than with uniform labor supply
            elasticities.
          • I follow Manning (2013) and estimate labor market power by measuring the sensitivity of worker
            turnover to the wage paid.
          • Bachmann et al., 2021; Ahlfeldt et al., 2022a; Berger et al.,
            2022) that nest a monopsonistic labor market in a spatial general equilibrium model (Redding
            and Rossi-Hansberg, 2017).
          • As firms have more labor market power
            over older workers, they face an upward-sloping labor supply curve that is less elastic in regions
            with an older workforce.
          • Firms choose in which labor market to operate in the sense that there is free
            entry at fixed costs into all locations.
          • How are differences in labor market competitiveness across space sustained in spatial equilibrium?
          • I use the model to quantify the importance of heterogeneity
            in labor market power for the urban wage premium and the spatial concentration of population.
          • My work is complementary to but quite different
            from this paper since I argue that population aging increases labor market power rather than
            product market power.
          • By analyzing the effects of a changing age composition of the workforce in the context
            of labor market power, I relate to literature on the labor market effects of population aging.
          • ECB Working Paper Series No 2906

            7

            after controlling for age, differences in labor market power between East and West Germany
            vanish.

          • They conclude that higher
            concentration is associated with higher labor market power (as in the model of Jarosch et al.,
            forthcoming).
          • I offer an alternative explanation why labor market power differs across regions:
            Since denser regions have a younger workforce, workers are more mobile in terms of switching
            jobs which implies lower labor market power of firms.
          • In this case, I infer a
            high labor supply elasticity and low labor market power of firms.
          • I contribute to this growing debate by
            quantifying differences in labor market power across worker groups and their effects on regional
            inequality.
          • While the model shows how demographics affect labor market power, the urban wage premium and agglomeration, one fundamental question remains open for future research: What
            are the policy implications of (differences in) labor market power?