Dominant Currency Paradigm

Transcription

1 Dominant Currency Paradigm Gita Gopinath Harvard CREI Lectures, 2018 Lecture III 1 / 5

2 Endogenous currency choice Engel (JIE, 2006), Gopinath, Itskhoki and Rigobon (AER, 2010) Prices are sticky one period ahead. firm chooses to price in the local (n) currency as opposed to the producer (i) currency if E t 1 Π( p n in,t ) > E t 1(Π( p i in,t ). second order approximation to the profit function around the flexible price at date t, E t 1 [ Π( p n in,t ) Π( p i in,t) ] E t Π pp [ ( p n in,t p n in,t) 2 ( p i in,t + e in,t p n in,t) 2] Π pp < 0 1 E t 1 2 Π [ pp ( p n in,t p in,t i e in,t)( p in,t n + p in,t i + e in,t 2 p in,t) ] n = 1 E t 1 2 Π [ pp (Et 1e in,t e in,t)( p in,t n + p in,t i + e in,t 2 p in,t) ] n The equality follows because p n in,t = p i in,t + E t 1e in,t, E t 1(E t 1e in,t e in,t) = 0 2 / 5

3 ] E t 1 [Π( p in,t) n Π( p in,t) i 1 2 Π pp Cov t 1 ( e in,t, e in,t 2 p in,t) n The firm will therefore choose LCP if: Cov t 1 ( p n in,t, e in,t) Var t 1 (e in,t ) < 1 2, if a firm desires low ERPT, in the short run before it has a chance to adjust prices, the firm is better off choosing local currency pricing that results in 0% pass-through in the short run. If short-run desired pass-through is high, the firm should choose producer currency pricing that results in complete (100%) pass-through prior to price adjustment. Multiple equilibria. 3 / 5

4 Dollar pricing if Cov t 1 ( p $ in,t, e i$,t) Var t 1 (e i$,t ) < 1 2, Imported inputs always pushes towards dollar pricing Strategic complementarities in pricing mixed 4 / 5

5 Cost Sensitivity to Exchange Rate, φ PCP High Pass through Calvo Menu Cost LCP Low Pass through Mark up Elasticity, Γ=ε/(σ 1) Figure 6: Currency Choice in the (Γ, φ)-space 5 / 5

6 Banking, Trade, and the Making of a Dominant Currency Gita Gopinath Harvard Jeremy Stein Harvard 1 / 43

7 What is a Dominant Currency? 1 Trade invoicing 2 / 43

8 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = / 43

9 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = 1.2 Prices rigid in currency of invoicing 2 / 43

10 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = 1.2 Prices rigid in currency of invoicing 2 International bank funding and corporate borrowing Dollar liabilities of non-u.s. banks comparable to U.S. banks 62% of foreign currency local liabilities of banks denominated in dollars Currency mismatch 2 / 43

11 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = 1.2 Prices rigid in currency of invoicing 2 International bank funding and corporate borrowing Dollar liabilities of non-u.s. banks comparable to U.S. banks 62% of foreign currency local liabilities of banks denominated in dollars Currency mismatch 3 Central bank reserves Dollar: 64%; Euro: 20%; Yen: 4% 2 / 43

12 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = 1.2 Prices rigid in currency of invoicing 2 International bank funding and corporate borrowing Dollar liabilities of non-u.s. banks comparable to U.S. banks 62% of foreign currency local liabilities of banks denominated in dollars Currency mismatch 3 Central bank reserves Dollar: 64%; Euro: 20%; Yen: 4% 4 Exorbitant Privilege Violation of UIP: Dollar risk-free assets pay lower expected returns (in a common currency) 2 / 43

13 Literature Trade invoicing (unit of account) Friberg (1998), Engel (2006), Devereux et al. (2004), Bacchetta and van Wincoop (2005), Gopinath et al. (2010), Goldberg and Tille (2013), Perez and Drenik (2017), Doepke and Schneider (2017) 3 / 43

14 Literature Trade invoicing (unit of account) Friberg (1998), Engel (2006), Devereux et al. (2004), Bacchetta and van Wincoop (2005), Gopinath et al. (2010), Goldberg and Tille (2013), Perez and Drenik (2017), Doepke and Schneider (2017) Safe assets and exorbitant privilege (store of value) Hassan (2013), Gourinchas and Rey (2010); Maggiori (2017); He, Krishnamurthy, Milibradt (2016), Farhi and Maggiori (2016) 3 / 43

15 What we do 1 Unified theory for dominance in trade invoicing and finance 2 Strategic complementarity of unit of account and store of value 3 Dominant currency, despite multiple candidates 4 Currency mismatch and exorbitant privilege 4 / 43

16 What we do 1 Unified theory for dominance in trade invoicing and finance 2 Strategic complementarity of unit of account and store of value 3 Dominant currency, despite multiple candidates 4 Currency mismatch and exorbitant privilege Eichengreen (2010): experience suggests that the logical sequencing of steps in internationalizing a currency is: first, encouraging its use in invoicing and settling trade; second, encouraging its use in private financial transactions; third encouraging its use by central banks and governments as a form in which to hold private reserves. 4 / 43

17 Main Idea High $ invoicing

18 Main Idea High $ invoicing High HH/firms $ expenses

19 Main Idea High $ invoicing High HH/firms $ expenses High demand for $ safe assets

20 Main Idea High $ invoicing Low r on $ safe assets High HH/firms $ expenses High demand for $ safe assets

21 Main Idea High $ invoicing Low r on $ safe assets High HH/firms $ expenses High demand for $ safe assets 5 / 43

22 Outline of Talk Full model: US, Euro Area, continuum of emerging markets 6 / 43

23 Outline of Talk Full model: US, Euro Area, continuum of emerging markets 1) Exogenous invoicing Single EM and US UIP violation 6 / 43

24 Outline of Talk Full model: US, Euro Area, continuum of emerging markets 1) Exogenous invoicing Single EM and US UIP violation 2) Endogenous invoicing Financial incentives for dollar invoicing 6 / 43

25 Outline of Talk Full model: US, Euro Area, continuum of emerging markets 1) Exogenous invoicing Single EM and US UIP violation 2) Endogenous invoicing Financial incentives for dollar invoicing 3) Strategic complementarity, Multiple Equilibria Continuum of EMs and US 6 / 43

26 Outline of Talk Full model: US, Euro Area, continuum of emerging markets 1) Exogenous invoicing Single EM and US UIP violation 2) Endogenous invoicing Financial incentives for dollar invoicing 3) Strategic complementarity, Multiple Equilibria Continuum of EMs and US 4) Emergence of single dominant currency Continuum of EMs, US and Euro 6 / 43

27 Outline of Talk Full model: US, Euro Area, continuum of emerging markets 1) Exogenous invoicing Single EM and US UIP violation 2) Endogenous invoicing Financial incentives for dollar invoicing 3) Strategic complementarity, Multiple Equilibria Continuum of EMs and US 4) Emergence of single dominant currency Continuum of EMs, US and Euro Some cross-country evidence 6 / 43

28 Outline of Talk 1) Exogenous invoicing 2) Endogenous invoicing 3) Strategic complementarity, Multiple Equilibria 4) Emergence of single dominant currency 7 / 43

29 Model: Exogenous invoicing Two countries: U.S and an EM. Two dates: 0 and 1 Two agents: Importers/Savers and Banks/Borrowers 8 / 43

30 Model: Exogenous invoicing Two countries: U.S and an EM. Two dates: 0 and 1 Two agents: Importers/Savers and Banks/Borrowers Importers max C 0 + βe 0 W 1 + θ log(m), C 0,D h,d $,A R (P1) subject to: C 0 W 0 Q h D h E 0 Q $ D $ Q R A R W 1 = D h + E 1 D $ + ξa R, 8 / 43

31 Model: Exogenous invoicing Two countries: U.S and an EM. Two dates: 0 and 1 Two agents: Importers/Savers and Banks/Borrowers Importers max C 0 + βe 0 W 1 + θ log(m), C 0,D h,d $,A R subject to: (P1) C 0 W 0 Q h D h E 0 Q $ D $ Q R A R W 1 = D h + E 1 D $ + ξa R, Preference for safe money-like assets, θ > 0 M = ( D α h h Dα $ $ ) 1 α h +α $ Krishnamurthy and Vissing-Jorgensen (2012), Stein (2012), Sunderam (2014), Greenwood, Hanson and Stein (2015), Nagel (2016) price in invoice currency set at time 0 and sticky through time 1 8 / 43

32 Model: Exogenous invoicing go α h Q h = β + θ (α h + α $ )D h α $ Q $ = β + θ (α h + α $ )D $ Q R = β E 0 (E 1 ) = E 0 = 1; E 0 (ξ) = 1 9 / 43

33 Model: Exogenous invoicing and banking market structure EM Banks (agglomeration of banks and borrowing firms) N local currency risky projects 10 / 43

34 Model: Exogenous invoicing and banking market structure EM Banks (agglomeration of banks and borrowing firms) N local currency risky projects Safe local claims B h ; safe dollar claims B $ ; risky local bonds B R 10 / 43

35 Model: Exogenous invoicing and banking market structure EM Banks (agglomeration of banks and borrowing firms) N local currency risky projects Safe local claims B h ; safe dollar claims B $ ; risky local bonds B R subject to, max E 0 [γn B h EB $ ξb R ] B h,b $,B R Q h B h + Q $ B $ + Q R B R N Limits to safe asset creation γ L : Worst case payout of project ĒB $ + B h γ L N Ē: Worst case value of EM currency Comparative disadvantage in manufacturing dollar safe claims E 0 γ = 1, E 0 ξ = 1 10 / 43

36 Model: Exogenous invoicing and banking market structure UIP Violation & Exorbitant Privilege: Q $ > Q h > Q R Q $ β Q h β = Ē 11 / 43

37 Model: Exogenous invoicing and banking market structure UIP Violation & Exorbitant Privilege: Q $ > Q h > Q R Q $ β Q h β = Ē Fund with $ deposits if cheaper than funding with h deposits. 11 / 43

38 Model: Exogenous invoicing and banking market structure UIP Violation & Exorbitant Privilege: Q $ > Q h > Q R Q $ β Q h β = Ē Fund with $ deposits if cheaper than funding with h deposits. Market clearing D $ =B $ + X $ }{{} exogenous,us D h = B h 11 / 43

39 Model: Exogenous invoicing and banking market structure UIP Violation & Exorbitant Privilege: Q $ > Q h > Q R Q $ β Q h β = Ē Fund with $ deposits if cheaper than funding with h deposits. Market clearing D $ =B $ + X $ }{{} exogenous,us D h = B h Walking up a supply curve D h = α h ( ) γln + ĒX $ α $ + α h α $ ( γln + ĒX $ ) D $ = α $ + α h Ē θ Q h = β + ( ) γln + ĒX $ > X $ Q $ = β + θē ( γln + ĒX $ ) 11 / 43

40 Model: Invoicing Shares, UIP Deviations, Dollar Borrowing Q $ Q h B $ θ(ē 1) (γ L N+ĒX $ ) ᾱ $ α $ ᾱ $ α $ (a) Q $ Q h (b) B $ ᾱ $ = α hēx $ γ L N High dollar invoicing = low return on safe dollar claims 12 / 43

41 Outline of Talk 1) Exogenous invoicing 2) Endogenous invoicing 3) Strategic complementarity, Multiple Equilibria 4) Emergence of single dominant currency 13 / 43

42 Model: Endogenous Invoicing Invoice fraction η of N in dollars (exports) max E 0 [γn 0 + γ(1 η)n + EγηN B h EB $ ξb R φ2 ] B h,b $,B R,η Nη2 subject to, Q h B h + Q $ B $ + Q R B R N + N 0 ĒB $ + B h γ L N 0 + (1 η)γ L N + Ēηγ L N B h γ L N 0 + (1 η)γ L N 14 / 43

43 Model: Endogenous Invoicing Invoice fraction η of N in dollars (exports) max E 0 [γn 0 + γ(1 η)n + EγηN B h EB $ ξb R φ2 ] B h,b $,B R,η Nη2 subject to, Q h B h + Q $ B $ + Q R B R N + N 0 ĒB $ + B h γ L N 0 + (1 η)γ L N + Ēηγ L N B h γ L N 0 + (1 η)γ L N Comparative disadvantage in manufacturing $ safe claims Currency mismatch: Ē Invoicing costs: φ (ηn) 2 2 N ; Proxies for risk-aversion of ultimate owners of exporting firms. 14 / 43

44 Model: Endogenous Invoicing Shares Dollar premium (DP): Invoicing choice (IC): Q $ Q h = β ( µ(η)(ē 1) κ ) η = γ L βφ (Q $ Q h ) 15 / 43

45 Model: Endogenous Invoicing Shares Dollar premium (DP): Invoicing choice (IC): Q $ Q h = β ( µ(η)(ē 1) κ ) η = γ L βφ (Q $ Q h ) Q $ Q IC DP η optimal η 15 / 43

46 Why invoice in dollars? To access cheap dollar financing Contrast with arguments based on optimal degree of cost pass-through into prices 15 / 43 Model: Endogenous Invoicing Shares Dollar premium (DP): Invoicing choice (IC): Q $ Q h = β ( µ(η)(ē 1) κ ) η = γ L βφ (Q $ Q h ) Q $ Q IC DP η optimal η

47 Equilibrium Values As Dollar Invoice Share Varies η Q $ Q h α $ ᾱ $ α $ α $ ᾱ $ α $ (c) Dollar Invoicing (d) Exorbitant Privilege B $ α $ ᾱ $ α $ (e) Dollar Borrowing 16 / 43

48 Why Invoicing Relevant if Exporters Can Hedge? Invoicing bundles goods-pricing with risk management. Why not unbundle? To hedge FX risk need to post collateral, reduces real investment Rampini and Viswanathan (2010, 2013, 2017), Rampini, Sufi and Viswanathan (2014), Rampini, Viswanathan and Vuillemey (2017) 17 / 43

49 Outline of Talk 1) Exogenous invoicing 2) Endogenous invoicing 3) Strategic complementarity, Multiple Equilibria 4) Emergence of single dominant currency 18 / 43

50 Endogenous Invoice Shares and Multiple Equilibria Continuum of EMs and US Safe asset demand only in own local currency and in dollars M i = ( D α hi hi D α ) 1 $i α hi +α $i $i Invoicing decisions in j effect invoicing shares in i α $i a + b η j dj a > 0: share of U.S. goods b > 0: share of goods from other EMs; a + b < 1 j i 19 / 43

51 Endogenous Invoice Shares and Multiple Equilibria Continuum of EMs and US Safe asset demand only in own local currency and in dollars M i = ( D α hi hi D α ) 1 $i α hi +α $i $i Invoicing decisions in j effect invoicing shares in i α $i a + b η j dj a > 0: share of U.S. goods b > 0: share of goods from other EMs; a + b < 1 j i 19 / 43

52 Endogenous Invoice Shares and Multiple Equilibria Integrated markets for dollar deposits, segmented markets for EM currencies. B hi = D hi, B Ri = A Ri, B $i di + X $ = D $i di i i 20 / 43

53 Endogenous Invoice Shares and Multiple Equilibria Integrated markets for dollar deposits, segmented markets for EM currencies. B hi = D hi, B Ri = A Ri, B $i di + X $ = D $i di i i Strategic complemetarities: b High η j

54 Endogenous Invoice Shares and Multiple Equilibria Integrated markets for dollar deposits, segmented markets for EM currencies. B hi = D hi, B Ri = A Ri, B $i di + X $ = D $i di i i Strategic complemetarities: b High η j High α $i

55 Endogenous Invoice Shares and Multiple Equilibria Integrated markets for dollar deposits, segmented markets for EM currencies. B hi = D hi, B Ri = A Ri, B $i di + X $ = D $i di i i Strategic complemetarities: b High η j High α $i High D $i

56 Endogenous Invoice Shares and Multiple Equilibria Integrated markets for dollar deposits, segmented markets for EM currencies. B hi = D hi, B Ri = A Ri, B $i di + X $ = D $i di i i Strategic complemetarities: b High η j High Q $ /Q h High α $i High D $i

57 Endogenous Invoice Shares and Multiple Equilibria Integrated markets for dollar deposits, segmented markets for EM currencies. B hi = D hi, B Ri = A Ri, B $i di + X $ = D $i di i i Strategic complemetarities: b High η j High Q $ /Q h High α $i High D $i 20 / 43

58 Simultaneous determination of invoicing and banking Integrated markets for dollar deposits, segmented markets for EM currencies. Multiple Equilibria with varying degrees of dollar invoicing Unique η = B $ = 0 Multiple η = B $ = 0 η > 0, B $ > 0 Unique η > 0, B $ > 0 a ā a a α hē (η γ LN + X $ ) γ LN 0 + (1 η )γ LN bη ā b > 1 ( αh Ē ( η ) γ L N + X $ η γ L N 0 + (1 η )γ L N α ) hx $ γ L (N 0 + N) α h X $ γ L(N 0 + N) 21 / 43

59 Simultaneous determination of invoicing and banking Multiple Equilibria with varying degrees of dollar invoicing η η a ā a 22 / 43

60 Simultaneous determination of invoicing and banking Multiple Equilibria with varying degrees of dollar invoicing Q $ Q h βφ γ L η a ā a θ γ L (N+N 0) 23 / 43

61 Outline of Talk 1) Exogenous invoicing 2) Endogenous invoicing 3) Strategic complementarity, Multiple Equilibria 4) Emergence of single dominant currency 24 / 43

62 Dollar vs. Euro: Emergence of a dominant currency Two global currencies: Dollar and Euro 25 / 43

63 Dollar vs. Euro: Emergence of a dominant currency Two global currencies: Dollar and Euro EM Importers/Savers M i = ( D α hi hi D α $i $i D α ) 1 ei αi ei α $i = a + b η $j dj α ei = a + b j i j i η ej dj 25 / 43

64 Dollar vs. Euro: Emergence of a dominant currency Two global currencies: Dollar and Euro EM Importers/Savers M i = ( D α hi hi D α $i $i D α ) 1 ei αi ei α $i = a + b η $j dj α ei = a + b j i j i η ej dj Symmetry: Ē ei = Ē $i = Ē Integrated markets for dollar and euro deposits 25 / 43

65 Dollar vs. Euro: Emergence of a dominant currency EM Banks max E 0[γ(N 0 + N) + γnη $i (E $i,1 1) + γnη ei (E ei,1 1) B hi E $i,1 B $i E ei,1 B ei ξb Ri φ 2 N(η2 $i + ηei 2 + 2cη $i η ei )] subject to, Q h B hi + Q $ B $i + Q e B ei + Q RiB Ri N + N 0 Ē(B $i + B ei ) + B i γ L(N 0 + (1 η $i η ei )N) + (η $i + η ei )Ēγ LN B i γ L(N 0 + (1 η $i η ei )N) 26 / 43

66 Dollar vs. Euro: Emergence of a dominant currency EM Banks subject to, max E 0[γ(N 0 + N) + γnη $i (E $i,1 1) + γnη ei (E ei,1 1) B hi E $i,1 B $i E ei,1 B ei ξb Ri φ 2 N(η2 $i + η 2 ei + 2cη $i η ei )] Q h B hi + Q $ B $i + Q e B ei + Q RiB Ri N + N 0 Ē e = Ē $ = Ē Ē(B $i + B ei ) + B i γ L(N 0 + (1 η $i η ei )N) + (η $i + η ei )Ēγ LN B i γ L(N 0 + (1 η $i η ei )N) Integrated markets for dollar and euro deposits, segmented markets for EM currencies. 26 / 43

67 Dollar vs. Euro: Emergence of a dominant currency Invoicing decision Market-clearing: η $i = γ L βφ (Q $ Q hi ) cη ei η ei = γ L βφ (Q e Q hi ) cη $i D hi = B hi i A Ri = B Ri i D $i = B $i + X i i D ei = B ei + X i i 27 / 43

68 Dollar vs. Euro: Emergence of a dominant currency Three possible equilibria No global currency (symmetric) η $ = η e = 0, B $ = B e = 0 Single/dominant global currency (asymmetric) η $ > 0, η e = 0, B $ > 0, B e = 0 Multiple global currencies (symmetric) η $ > 0, η e > 0, B $ > 0, B e > 0 28 / 43

69 Dollar vs. Euro: Emergence of a dominant currency Single/dominant global currency sufficient safe-asset demand to sustain one global currency, but not two Both = 0 Both = 0 One > 0 One > 0 One > 0 Both > 0 Both > 0 a s ā n ā b ā s a Figure: Equilibria supported as a function of a 29 / 43

70 Numerical Example Parameter N N 0 X α h φ θ β γ L Ē b c Value / 43

71 Dominance in Trade Invoicing 31 / 43

72 Dominance in Banking 32 / 43

73 Currency Mismatch 33 / 43

74 Exorbitant Privilege 34 / 43

75 Comments Which currency dominates? The role of history Pre-1999, a $ >> a e, Dollar only dominant currency Post-1999, closer in size, but history picks the dollar Can take a long time to reverse 35 / 43

76 Comments Which currency dominates? The role of history Pre-1999, a $ >> a e, Dollar only dominant currency Post-1999, closer in size, but history picks the dollar Can take a long time to reverse Why dollarization of central bank reserves? Lender of last resort of banks Central bank asset mix mirrors commercial banks liability structure Obstfeld, Shambaugh and Taylor (2010) 35 / 43

77 Data: Relation between trade invoicing and bank liabilities D $,i = α $,i Qe β D e,i α e,i Q $ β 36 / 43

78 Data: Relation between trade invoicing and bank liabilities D $,i = α $,i Qe β D e,i α e,i Q $ β Dollar share in bank liabilities CH SE DKNO TR GB AU KR JP CA Dollar share in trade invoicing R-squared= 0.72 BIS Locational Banking Statistics, Local Liabilities 36 / 43

79 Data: Relation between trade invoicing and bank liabilities Dollar share in bank liabilities (deposits and loans, non-banks) CH DK SE Dollar share in trade invoicing R-squared= 0.82 GB AU KR CA JP BIS Locational Banking Statistics, Local liabilities 37 / 43

80 Data: Relation between trade invoicing and central bank reserves IMF, Wong (2007), Gopinath & Stein (2018, AER P&P) 38 / 43

81 Conclusion 1 Unified theory for dominance in trade invoicing and finance Invoice in dollars because dollar financing cheap Dollar financing cheap because of invoicing in dollars 2 Strategic complementarity of unit of account and store of value 3 Dominant currency, despite multiple candidates 4 Currency mismatch and exorbitant privilege 39 / 43

82 Conclusion 1 Unified theory for dominance in trade invoicing and finance Invoice in dollars because dollar financing cheap Dollar financing cheap because of invoicing in dollars 2 Strategic complementarity of unit of account and store of value 3 Dominant currency, despite multiple candidates 4 Currency mismatch and exorbitant privilege China s Renminbi Share as settlement currency: 0% in 2010, 25% in 2015 Second most widely used currency in global trade finance 39 / 43

83 Micro-foundation for P1 back Risk-Neutral Investors: max C C0 n 0 n + βe 0 C1, n,cn 1,Dn h,dn $,An R (P2) subject to: C n 0 W n 0 Q h D n h E 0Q $ D n $ Q RA n R C 1 = D n h + E 1D n $ + ξan R, Q R = β, A R > 0 D n h = Dn $ = 0 if Q h > β, Q $ > β 40 / 43

84 Micro-foundation for P1 back Risk-Averse Importers: max E 0 U(C 1 ), C 1,D h,d $ subject to: (P3) W Q h D h E 0 Q $ D $ P 1 C 1 D h + E 1 D $, where the consumption aggregator and price level are given by, C = C 1 α h C α $ P = P1 α h (E 1 P $ ) α α α (1 α) 1 α = E1 α α α (1 α) 1 α = νeα 1 and α = α $ α h +α $ 41 / 43

85 Micro-foundation for P1 back (a) (b) Figure: Relative demand for dollar deposits (in partial equilibrium) 42 / 43

86 Micro-foundation for P1 back (a) (b) Figure: Full equilibrium 43 / 43