Speaker unverified: evaluation

Transcript context

…Sure. What we do know is, in the case of many countries in the world and many exporters, they also tend to be importers. The value-added component of trade has declined over time, and because of the dollar’s dominant role in the trading system, everybody is pricing their goods to each other in dollars. In a way, the way you want to think about it is that when China is exporting some certain goods to the rest of the world, if its imports are priced also in dollars, then those inputs that are going into its production function are priced in dollars and sticky in dollars, then you have an incentive to just price in dollars, and your dollar price is not going to move that much because the exchange rate adjustment is not doing much, because an important part of your cost of production is also in dollars. That’s the reason why we see a fair amount of dollar pricing in the world. The sense that somehow China should be able to, or any other country should be able to, cut their dollar prices by a lot when their currency depreciates is not the case, because they are also importing inputs from the rest of the world that are priced in dollars, and they don’t have that much of a margin to squeeze. Now, of course, there’s variation across goods. Some goods rely more on inputs that are dollar-priced, some depend less, and you do see in the data that that variation matters. You do see that the pricing behavior is a function of how much do these firms rely on imported inputs. It does seem to me odd that simply the unit of account, to some extent, determines whether firms behave competitively or as if they have some market power. That goes against all my economic intuitions, and it puzzles me.…

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