Dollar dominance and the transmission of monetary policy

McLeay, Michael and Tenreyro, Silvana ORCID: 0000-0002-9816-7452 (2025) Dollar dominance and the transmission of monetary policy. Quarterly Journal of Economics. ISSN 0033-5533 (In Press)

Text (dominant_currency 7 May) - Accepted Version Pending embargo until 1 January 2100. Available under License Creative Commons Attribution. Download (1MB)

Abstract

Has the dominance of the dollar in global trade rendered monetary policy ineective? An emerging view contends that if a country invoices its exports in dollars, exchange rates cannot stabilize economic activity, as the classical expenditure-switching channel is muted. This view rests on the premise that export prices are sticky in dollars, breaking the link between export demand and depreciations. But this assumption is not borne out by the data: goods priced in dollars tend to have more exible prices, along with higher elasticities of substitution. We propose a model with more realistic assumptions and show that even with dollar pricing, depreciating the currency by loosening monetary policy can still boost exports and activity materially. The limit to any expansion is not demand, but supply capacity. We also show that low exchange-rate pass-through to dollar prices is not informative about price stickiness. The price response to exchange rates is small when demand elasticities are high, even with exible prices: low pass-through is an equilibrium result, not evidence of a nominal friction.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Economics
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects) F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q30 - General
Date Deposited:	08 May 2025 09:18
Last Modified:	09 May 2025 20:10
URI:	http://eprints.lse.ac.uk/id/eprint/128085

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