02328cas a2200277 a 4500 AALejournalIMF018084 230101c9999 xx r poo 0 0eng d 5.00 USD 9781484330173 1018-5941 BD-DhAAL BD-DhAAL Casas, Camila. Dominant Currency Paradigm : A New Model for Small Open Economies / Camila Casas, Federico Diez, Gita Gopinath, Pierre-Olivier Gourinchas. Washington, D.C. : International Monetary Fund, 2017. 1 online resource (62 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer's currency or in local currency. We model instead a 'dominant currency paradigm' for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm. Mode of access: Internet Diez, Federico. Gopinath, Gita. Gourinchas, Pierre-Olivier. IMF Working Papers; Working Paper ; No. 2017/264 Full text available on IMF http://elibrary.imf.org/view/journals/001/2017/264/001.2017.issue-264-en.xml IMF e-Library