Economists have long noted the presence of one or more ‘global currencies’ in the international monetary system. This where, in the process of a trade or financial transfer, two parties will transact using a third currency (typically, the US dollar), rather than either of their own. Originally, this was focussed more on the international finance side, starting with debates on exorbitant privilege and the ‘Triffin Dilemma’. Today, there is much research focusing on the idea of ‘original sin’ in terms of currency choice for borrowing. 

More recently, economists have started to pay more attention to the potential use and effects of global currencies in trade. As Gopinath (2016) and others have documented, the US dollar has an oversized role in trade invoicing.

A common view with existing research is that this dollar-invoicing dampens the textbook effects of an ‘exchange rate change’ on trade volumes. The logic is that if a price is fixed in dollars, a depreciation in the exporter’s currency makes no difference to the final price paid by the importer.  So, the greater the use of dollar invoicing, the lower the trade elasticity. But in my recent Flemming lecture (Tenreyo 2019), I take a different view, highlighting three channels by which deprecations still benefit exporters.

First, just because we observe a price is set in dollars, it doesn’t mean the price is ‘sticky’ in US dollars. It may merely reflect the ease of posting prices and/or settling transactions in a widely used currency. Exporters could still ‘pass through’ the depreciation in their exchange rate to the price they quote in dollars.

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Second, even if prices don’t adjust in dollar terms, a depreciation of the exporters’ currency vis-à-vis the dollar would still boost exporters revenues and profits one-for-one when measured in domestic currency terms. In, for example, a ‘Melitz-type’ world, where firms’ productivities and varieties of good differ (Melitz 2003), this would induce some firms to start exporting, and prompt additional varieties to be offered for export.

Third, if exporting firms are ‘price-takers’ in the global market, and output is supply constrained, then a rise in the domestic currency prices induces the firm to supply more at the new market price. This could well be the case for commodity exporters who take the world price as given. But it could also be true for many ‘normal’ firms who are not giants of their industry and have little market power.

This existing bod research still has much longer to run. And this is, of course, just one facet of the bigger issue of global currencies. More broadly, there is much more for researchers to explore, including what determines exporter choices of third currency invoicing, the consequences for the financial system of global currencies, and the determinants of which currencies achieve global status.  

Trading networks

Trading networks are an example of another issue where the open economy is a source of structural change. The traditional view, embodied in international real business cycle research, was that greater openness to trade meant greater exposure to foreign shocks and hence more volatility. But the empirical evidence on this was more mixed. 

In a recent paper (Caselli et al. 2020), my co-authors and I provide a theoretical contribution which challenges the view that more openness always means more volatility, and this proposition could potentially explain the ambiguous results in the empirical work.

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When a country becomes more open to trade, it becomes simultaneously more specialised in terms of the products it makes and exports, but more diversified in terms of the partners it trades with.  For example, in the early 1990s, the Finnish economy underwent a radical change: its exports became much more concentrated in one product (mobile phones) but at the same time, it shifted its trading patterns away from a single dominant importer (the Soviet Union) to a much more diverse range of partners. 

We formalise the economic intuition that these two effects work in opposite directions. Greater specialisation in one product increases potential volatility, but greater diversity of partners reduce it. For plausible empirical calibrations, we show that the relative balance of these effects can go either way. 

More broadly, there is much scope for new work in trading networks, with recent events throwing up many new topics for researchers to explore. It is not clear that globalisation is necessarily a one-way street. Brexit will raise trading frictions with the UK’s closest partners, and it’s possible that Covid-19 may prompt some ‘re-shoring’ of production to reduce supply chain vulnerabilities. There are also the potential consequences of possible trade-wars. While traditional research has focussed on the first-order effects of tariffs, it is possible that uncertainty surrounding future trading arrangements might create second-order effects as well.

The challenges of the open economy are more important than ever

While great progress has been made, global economic developments continually throw up new challenges. Economists have long understood that modern economies cannot be modelled as closed ‘island economies’. More importantly, many global developments cannot be captured in existing models simply by dialling the shocks or elasticities up and down. Rather, they have the potential to ‘re-wire’ the linkages in the global economy and, as a result, call for new models. 

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Further, this holds as much for the financial sector as in the real economy. New policy instruments, the presence of non-bank actors, and potential financial fragmentation all pose important questions for economists to grapple with in the years ahead.

It makes sense that the ‘the open economy’ is one of the key themes for the Bank of England’s Agenda for Research. The potential for global developments not just to influence domestic economies but to be sources of structural change is as strong as ever. This will provide researchers and policymakers with plenty of food for thought in the coming years.


Caselli, F, M Koren, M Lisicky and S Tenreyro (2020), “Diversification Through Trade”, The Quarterly Journal of Economics 135(1): 449-502.

Gopinath, G (2016), “The International Price System”, Jackson Hole Economic Symposium.

Melitz, M (2003), “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity”, Econometrica 71(6): 1695-1725. 

Tenreyro, S (2019), “Monetary Policy and Open Questions in International Macroeconomics”, John Flemming Memorial Lecture, Bank of England.