Gopinath, currently John Zwaanstra Professor of International Studies and
Economics, Department of Economics, Harvard University delivered the Exim
Bank’s 33rd Commencement Day Annual Lecture in Mumbai on December 21, 2017. She
spoke on the topic, “Dollar Dominance in Trade: Facts & Implications”.
Prof. Gopinath has earlier served as a member of the Eminent Persons Advisory
Group on G-20 Matters for the Ministry of Finance, Government of India, says a
In her lecture,
Prof. Gopinath explained the phenomenon of the dominance of the U.S. dollar in
international trade driving the U.S. and non-U.S. economies, and its
implications on policy frameworks related to trade, exchange rate, and
inflation in those economies.
opined that international trade is better viewed through the lens of the
‘Dominant Currency Paradigm (DCP)’ rather than the benchmark ‘Mundell-Fleming
Paradigm (MFP)’, as it will explain certain puzzling features of data and lead
to new policy conclusions. According to DCP, a large fraction of world exports
is priced or invoiced in the U.S. dollars, thereby making it the ‘dominant
currency’ in world trade.
She elucidated that
fluctuations in the U.S. Dollar had a relatively stronger impact on the
inflation in non-U.S. economies (especially the developing countries) than on
the inflation in the economy of the United States. Therefore, bilateral trade
prices and quantities depend on the dollar exchange rate, rather than the
bilateral exchange rate between the trading economies, thereby emphasizing that
the U.S. dollar has become the key predictor of trade volume and inflation in
the rest of the world.
highlighted that the dollar is not only dominant in trade but also in
international finance. She mentioned that international borrowing by non-U.S.
firms is mostly by way of Dollar-denominated debt, rather than any other global
currency, such as Euro.
recommended that individual country policies and global policies recognize the
inherent asymmetries in the international monetary system. Heavy dependence of
emerging markets on the Dollar in their international transactions has
far-reaching consequences for world dollar interest rates and U.S. monetary
policy spill-overs, given their rising share in world GDP.
Prof. Gopinath also
suggested that although the DCP framework applies to any environment with
dominant currencies and does not require the dominant currency to be the
dollar, given the entrenched use of the dollar in both international trade and
finance and the strength of the U.S. monetary system, displacing the dollar
will be a difficult and long-term endeavour.
Mr. David Rasquinha, Managing Director, Export-Import Bank of India, expressed that
the Bank is in the 36th year of its operations this year and stated that the
Commencement Day Lecture series which started in 1986, and now in its 33rd
edition has been contributing to the debate and discussions on contemporary
trade and development issues impacting global economy. He emphasized that a
country’s nominal exchange rate has important consequences for its trade and
economic policy and therefore, Prof. Gita Gopinath’s insights into the paradigm
of “Dollar Dominance” were invaluable.
Mallick, Deputy Managing Director, Export-Import Bank of India, in his
concluding remarks said that Prof. Gopinath’s lecture on dollar dominance in
trade, highlighted policy implications related to inflation, export
competitiveness, international finance, exchange rate and monetary policy,
which are critical for emerging market economies including India.