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Bilateral Trade in Services and Exchange Rates: Evidence of Dominant Currency Pricing

Author

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  • Ms. Nan Li
  • Sergii Meleshchuk

Abstract

This paper estimates, for the first time, the exchange rate elasticity of bilateral trade in services, providing indirect evidence of both producer currency pricing and dominant currency pricing in services trade. We developed a novel dataset of bilateral trade flows in services, covering twelve broad service sectors across 245 countries from 1985 to 2022. We find that, similar to manufacturing trade, the value of services trade is more closely associated with US dollar exchange rates than with bilateral exchange rates, although this relationship varies by service category. Zeroing in on tourism, where proxies for trade volume (such as tourist arrivals and hotel stays) are available, we find that bilateral exchange rates play a larger role on tourism volume compared to the dollar exchange rates. In addition, in the context of global supply chain, we find that downstream dollar exchange rate movements, rather than downstream bilateral exchange rates, affect the demand for service imports via forward linkages.

Suggested Citation

  • Ms. Nan Li & Sergii Meleshchuk, 2024. "Bilateral Trade in Services and Exchange Rates: Evidence of Dominant Currency Pricing," IMF Working Papers 2024/242, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2024/242
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