The vehicle currency, invoicing of trade, and exchange rate pass-through

This dissertation consists of three loosely-related chapters that address a number of topics in international trade and finance.; In Chapter 1, a country's decision of whether to use its domestic currency to invoice international trade is modelled on the basis of transactions cost minimization. Invoicing influences the impact effect of an exchange rate change on both import and export prices in domestic currency and on the trade balance. Determined within the model is a currency's aggregate use in invoicing, as well as its interbank bid-ask spread transactions cost. Four stylized facts of invoicing are explained. Empirical results support the hypothesis that a currency's use in invoicing is inversely related to its interbank bid-ask spread.; Chapter 2 addresses the issue of a vehicle currency in interbank foreign exchange, which is the dominant feature of the transactions technology in the invoicing model. Issues examined are the choice of which currency plays the role of the vehicle, its efficiency, its uniqueness, and its stability over time.; The pass-through of exchange rate changes to domestic currency prices of imports is estimated in Chapter 3 for a cross-section of 29 countries over the entire floating rate period, and is analyzed for inter-country differences in completeness and dynamics. Country characteristics that affect import supply and demand elasticities--size, openness, share in world imports, and commodity composition of imports--are examined for their effect on the completeness and speed of pass-through. Empirical results confirm the inverse relationship between domestic currency invoicing and the impact effect of an exchange rate change on import prices.