On the choice of the currency of invoice in international trade

Abstract

The determination of the currency of invoice as an optimal risk sharing contract between exporters and importers is studied. It is shown that under Purchasing Power Parity the invoicing is concentrated on currencies with small inflation risks. With real exchange rate risks more of exporter's currency is used if the exporter's currency is undervalued or if the exporter is more risk averse than the imported. Finally, it is shown that the more open an economy is the larger is the share of foreign currencies in invoicing.