Staff Working Paper No. 1,074
By Marco Garofalo, Giovanni Rosso and Roger Vicquéry
We study a unique episode of aggregate transition to dominant currency pricing: the dollarisation of UK exports in the aftermath of the 2016 Brexit referendum. Following the 2016 depreciation of the pound, the share of non‑EU UK exports invoiced in the UK domestic currency decreased sharply 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. Relying on transaction‑level data on the universe of UK trade and employing shift‑share and event‑study identification strategies, we show that large foreign‑exchange movements can generate an aggregate transition in invoicing choices. This is driven by firms with low levels of operational hedging, that is whose exports are not denominated in the same currency as their import. We find that this currency‑mismatch valuation channel accounts for most of the transition to dollar pricing, above and beyond effects from strategic complementarities and market power. Finally, we show that such a shift in export pricing has important aggregate consequences for export pass‑through and the allocative effects of price rigidities: a US$ appreciation depresses demand for UK exports by twice as much than before this ‘dominant currency pricing transition’.
Dominant currency pricing transition 