Well done to @GitaGopinath and the team for the timely report and for putting together this superb panel chaired by @SoumayaKeynes; time was too short to explore all the issues, but a couple of the points deserve emphasis
A short thread follows
A short thread follows
We're accustomed to thinking of the global economy as a collection of "islands", each island being a national GDP area; exchange rates then adjust to bring balance of payments into balance 
Today's report from the IMF shows that the short-term response of exports to a depreciation does not follow this script; imports decline and exports barely budge imf.org/en/Publication…
The authors attribute their findings to invoicing in US dollars ("dominant currency pricing")
The argument is that when exports are invoiced in dollars, competitiveness deteriorates when the destination country sees a depreciation against the dollar; @GitaGopinath has pioneered this influential strand of the literature
See, for instance, here kansascityfed.org/~/media/files/…
See, for instance, here kansascityfed.org/~/media/files/…
There are also several other developments that have reinforced the impact of dominant currency pricing; my own remarks on the panel today was drawing attention to two additional forces
The first is the growing footprint of global firms on international trade and finance
Global firms don't fit neatly into the "island economy" model; they operate globally, producing and employing workers in several islands, and owned by shareholders globally
Global firms don't fit neatly into the "island economy" model; they operate globally, producing and employing workers in several islands, and owned by shareholders globally
Of the profit they earn abroad, some are paid out to investors but a large chunk is held back for investment or simply parked in financial securities; this "undistributed profit of firms" adds to the current account of the island where the firm is headquartered
We know "undistributed profit of firms" by another name; it is "corporate saving"; and corporate saving is key to understanding current account balances in the decade or so
The left hand panel shows how the shifts in the current account over 2007-2017 correlate with corporate saving in those countries over the same period
Countries with large corporate saving increased current account surpluses (or reduced deficits)
Countries with large corporate saving increased current account surpluses (or reduced deficits)
When global firms straddle national borders (and their profits, which are so pivotal for current account balances accrue to where the firm is registered) it is perhaps not surprising that exchange rate changes don't work in the textbook "island economy" way
These issues were discussed in a BIS Quarterly Review piece here bis.org/publ/qtrpdf/r_…
(Philip Lane joined as a co-author, together with Stefan Avdjiev and Mary Everett)
(Philip Lane joined as a co-author, together with Stefan Avdjiev and Mary Everett)
For a shorter version, see this presentation at the IMF Spring Meetings last April bis.org/speeches/sp190…
There's more
The growing footprint of global firms means that even merchandise exports need to be understood better; "exports" does not mean that the good actually crosses the border
The growing footprint of global firms means that even merchandise exports need to be understood better; "exports" does not mean that the good actually crosses the border
Customs-based exports can diverge from exports in the balance of payments (sometimes by large margins)
Here are some other examples of countries where balance of payments exports are larger than customs-based exports bis.org/speeches/sp190…
When a large smartphone maker produces offshore under a contract manufacturing agreement, the smartphone may never touch the shores of the smartphone maker's home country, but the smartphone will still be deemed its exports
Currency appreciation in the home country may not have much of an effect in curbing smartphone exports if the offshore location doesn't experience a similar appreciation
Finally, there is the important issue of working capital of exporting firms
Sustaining global value chains entails heavy financial demands; inventories need to be financed and given dollar invoicing, the financing is mostly in dollars; see this paper with Valentina Bruno bis.org/publ/work819.h…
Given the well-known relationship between the broad dollar index and dollar credit conditions, a broad strengthening of the dollar could dampen trade by curtailing global value chains
In all these ways, the "island economy" model of the global economy has become less and less useful
