UCLA

This dissertation examines the role of invoicing currency and input-output (I-O) linkages between countries in the global economy. The way in which countries trade intermediate goods can serve as a transmission channel for propagating shocks, and in a sticky price environment, the currency used for bilateral trade transactions can have significant implications for exchange rate pass-through. The first chapter proposes a two-country static model in which countries trade final and intermediate goods with an exogenous invoicing currency. Through the lens of the model, an analytical framework is provided for how exogenous shocks affect prices, quantities, and global trade. The second chapter extends the baseline model to a quantitative multi-country model calibrated by data. Counterfactual analysis of the model suggests that expenditure switching in the calibrated model is muted by half compared to a model with full dollar invoicing. The last chapter constructs a multi-country, multi-sector model to analyze the impact of sanctions on Russian exports on global economy. Simulation results suggest that import restrictions imposed by Western countries on Russian energy exports can have varying effects on different countries. When Russia can redirect its exports to other countries under sanctions, export redirection benefits Russia's welfare, while most other countries experience a decline in welfareChapter 1 explores the role of input-output (I-O) linkages and invoicing currency in global trade. To this end, a theoretical model is proposed in which two countries, Home and the Rest of the World (ROW), engage in a bilateral trade transaction, with the United States (US) acting as the dominant currency country. The primary objective of the model is to analyze the impact of dollar appreciation resulting from contractionary US monetary policy on global trade, taking into account exogenous invoicing currency and I-O linkages. The baseline model suggests that the global trade response is dependent on the interaction between dollar invoicing shares and foreign intermediate input shares. Chapter 2 studies whether world trade is close to local currency pricing (LCP) or dominant currency pricing (DCP) using a quantitative model with calibrations. Recent literature has focused on the empirical fact that global trade is dominantly invoiced in a few currencies such as the US dollar or Euro. While the majority of international trade is intermediate goods trade, there is a conflicting opinion that questions if DCP prices at the border are allocative since final goods prices are sticky in local currency (LCP). Simulation results suggest that the global trade response to dollar appreciation of the calibrated model lies between the responses under a full DCP and full LCP model. Chapter 3 examines the impact of economic sanctions on Russian exports and the subsequent trade and welfare responses of countries using a calibrated model introduced by Baqaee and Farhi (2022). The results indicate that import restrictions imposed by Western countries on Russian energy exports can lead to negative welfare effects for these countries, particularly for EU nations heavily reliant on Russian energy imports. However, the impact on the overall world economy is quantitatively small, as Russia can redirect its exports to non-Western countries. Additionally, the analysis demonstrates that the welfare response of countries is influenced by the ability for Russian to redirect exports to another destination countries such as China, and trade elasticities, with less substitutability of goods across countries resulting in a more detrimental impact on Russia's welfare.