Speaker unverified: belief

Transcript context

…The invoicing currency. I would say there’s a few things. One is there is the short term. There is the near term when the invoicing currency matters, but just the example I just gave you tells you why people have chosen to invoice in one currency versus another. The way you think about it is that, ideally, if you could flexibly adjust your price at every instant in time, then obviously invoicing currency is irrelevant, but companies do sign longer-term contracts. One of the things I looked into when I was doing the research on this was to say, “If companies are signing long-term contracts, is this both about prices and about quantities?” It’s not just that I sign a contract that says I’m going to sell to you at this per-unit price, but it’s also that I’m only going to sell X amount of quantity, in which case then these prices are not allocative. If you look at the contracts, that’s actually not the case. The way it works is that the companies say, “We’ll sell it to you at this price. The quantities, we have a range. Obviously, it’s not like we can send you any amount. There is a range of quantities at which we will send to you,” so there’s that much more flexibility. There is the short term, and then there is the medium term. I think what’s important to recognize is that the invoicing decision itself is not just some Calvo fairy. It’s not just some “Here, we’re going to assume that we wake up and somebody’s told me to price in dollars.” There is a reason why the dollar is used as a pricing currency around the world. From a pure first principle, it’s not a decision about which currency to invoice. There’s evidence consistent with that. Now, as you know, the gravity equation is one of the most reliable regularities in international trade economics. Basically, the quantity of trade is inversely proportional to the distance of countries once you adjust for incomes and some other matters. That seems to be another case where the relative price doesn’t matter that much because few people think the gravity equation is about transportation costs. Why is it, in your view, that the gravity equation holds so reliably and so consistently?…

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