Research

Dominant Currency Pricing Transition, with Giovanni Rosso and Roger Vicquery.  

[Paper] [Bank of England Working Paper] [Oxford Discussion Paper] [Centre for Macroeconomics Discussion Paper] [Slides] 

[VoxEU] [Bank Underground] [Twitter thread] [Coverage: FT, Alternatives Economiques]

[Data - Figure 1]

Abstract: We explore an episode of aggregate transition to dominant currency pricing in a large developed economy, relying on transaction-level data on the universe of UK trade between 2010 and 2022. Until 2016, the majority of UK non-EU exports were invoiced in British pounds, the ”producer” currency. However, in the aftermath of the June 2016 Brexit referendum and the subsequent depreciation of the pound, the share of non-EU UK exports invoiced in pounds started to sharply decrease – by more than 20 percentage points. This was mirrored by an increase of similar magnitude in the share of US dollar invoicing, which by 2019 overtook the pound as the main non-EU export invoicing currency. Using shift-share and event-study identification strategies, we show that large foreign-exchange movements can generate a transition in invoicing choices for firms with low levels of operational hedging, that is whose exports are not denominated in the same currency as their import. We find that that this currency-mismatch valuation channel accounts for most of the transition away from producer currency pricing, above and beyond effects from strategic complementarities and market power. Finally, we show that this shift in export pricing paradigm has important aggregate consequences for export pass-through and the allocative effects of price rigidities. Exports exhibit significantly higher elasticity to USD exchange-rate movements after the Brexit referendum: a USD dollar appreciation depresses demand for exports by twice as much than before this ‘dominant currency pricing transition’. 

Presentations: Bank of England, University of Oxford, Joint BIS, BoE, ECB and IMF Spillover Conference [Basel, April 2024], LSE-Oxford Workshop in International Macroeconomics and Finance [London, May 2024] 

Not to Belittle NTBs: Non-Tariff Barriers and Trade During Brexit, with Rebecca Freeman, Enrico Longoni, Rebecca Mari, Kalina Manova, Thomas Prayer, Thomas Sampson.

[Paper] [Slides] 

[Bank Underground] [Twitter thread]

Abstract: This paper studies the impact of Brexit on the UK’s trade with the EU relative to its trade with the rest of the world. We find no evidence that uncertainty and anticipation effects led to a significant decline in relative UK trade with the EU during the period after the UK voted for Brexit in 2016 and before the change in policy was implemented under the new Trade and Cooperation Agreement (TCA) in 2021. However, the UK’s departure from the EU’s single market and customs union at the start of 2021 caused a major shock to UK-EU trade. We estimate that the new TCA trade relationship led to a sudden and persistent 25% fall in relative UK imports from the EU. In contrast, we find a smaller and only temporary decline in relative UK exports to the EU, but nevertheless a large and sustained drop in the extensive margin of exports, driven by the exit of low-value relationships. The timing and asymmetry of Brexit effects on UK imports and exports is puzzling and provides evidence of important differences in adjustment to integration and disintegration shocks.

Presentations: NIESR [London, November 2023], ASSA session "De-Globalisation and Reconfiguration of Trade Flows" [San Antonio, January 2024]