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Prof. Gita Gopinath delivers Exim Bank’s 33rd Commencement Day Annual Lecture

Professor Gita 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 release.

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.

Prof. Gopinath 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.

Prof. Gopinath 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.

Prof. Gopinath 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.

 

Mr. Debasish 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.

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