Authors:

  • Gita Gopinath

Excerpt

Dollar Dominance in Trade and Finance. Gita Gopinath, 2019, Book Chapter, "According to the major paradigm in international macroeconomics, namely the Mundell-Fleming paradigm (Mundell 1963; Fleming 1962), the importance of a country’s currency in international trade is tied closely to its share in world trade. This is because each country is assumed to export its goods in its own currency. That is, if we consider trade among the United States, India, and Japan, the assumption is that all exports from the United States are invoiced in dollars, all exports from Japan are invoiced in yen, and all exports from India are invoiced in rupees. Further, because the paradigm assumes that prices are sticky in the exporter’s currency, exchange rate fluctuations across countries affect their bilateral terms of trade, defined as the ratio of the at-the-dock price of imports to that of exports." Link