Research

 

 Working papers

This paper investigates the relationship between invoicing currency and input-output (I-O) linkages in global trade. Specifically, the paper explores how countries respond to dollar appreciation resulting from contractionary US monetary policy. I propose a theoretical and quantitative framework to analyze this impact, taking into account the exogenous currency of invoicing with I-O linkages. The model suggests that the response to dollar appreciation depends on the interaction between dollar invoicing shares and foreign intermediate input shares. To quantify the effect, a multi-country dynamic general equilibrium model is built with calibrated I-O linkages and invoicing shares. The quantitative results show that the expenditure switching of the calibrated model is muted in half compared to a model with full dollar invoicing. This research sheds light on the importance of invoicing currency and I-O linkages in global trade, and provides implications on the global monetary policy.


[Kiel Policy Brief]

How would the German economy cope with a hard economic decoupling from China? We study a scenario where the global economy fragments into three distinct blocs: the G7 economies and their allies, China and her allies, as well as neutral countries. German trade with China would have to be entirely rerouted to countries within the ”Western” block and neutral countries. We quantify the costs of such a worst-case hard decoupling using the Baqaee and Farhi (2021) multi-sector model of the world economy. Our key finding is that a total cut-off of trade relations with China would have severe but not devastating effects on the German economy. The welfare loss for Germany (relative to a no-cut-off baseline) would be around 5% of Gross National Expenditure (GNE) over the first few months and around 4% over the first year, plus additional short run costs due to business-cycle amplification effects. In the medium and long run, the costs would fall to a permanent loss in the 1-2% range. Less extreme decoupling or gradual de-risking scenarios (“small yard, high fence”) would incur smaller costs. The single most influential assumption relates to the “trade elasticity,”, i.e., the ease and speed with which trade can be reorganized away from China to neutral countries and within the “Western” block. Our findings, in particular the critical dependence of economic costs on the time horizon over which adjustments take place, provide some rationale for embarking on a gradual de-risking trajectory to avoid a costly and politically contentious hard decoupling dictated by geopolitical events. 


 Work in progress