No. 201. Price Setting Transactions and the Role of Denominating Currency in FX Markets

by Richard Friberg and Fredrik Wilander

January 2007

Abstract

This report, commissioned by Sveriges Riksbank, examines the role of currency
denomination in international trade transactions. It is divided in two parts. The
first part consists of a survey of the price setting and payment practices of a large
sample of Swedish exporting firms. The second part analyzes payments data from
the Swedish settlement reports from 1999-2002. We examine whether invoicing
patterns of Swedish and European companies changed following the creation of
the EMU and how the currency denomination of exports differ from that of
imports. Finally we consider the possibility that changes in invoicing patterns are
correlated with changes in nominal exchange rates. Our main finding is that the
same currency to a large extent is used for price setting, invoicing and payment
for exports to third parties. We also find that the currency of the customer is the
most used and that the euro is replacing the Swedish krona both in transactions
with EMU-member countries but outside the EMU. Finally we find some
evidence of a weak correlation between aggregate changes in invoicing patterns
and changes in the trade weighted exchange rate over the period 1999-2002.

Keywords:

Invoicing currency, exchange rate pass-through, price setting currency, exchange rate exposure, nominal rigidity

JEL classification:

JEL: F31, F41, G32