This article is presented in six sections In
This article is presented in six sections. In the following section, we provide some background on currency internationalization and the discussions on the use of vehicle currencies. Then, in Section 3, we describe our database and the methodology. Section 4 describes in which currencies the Brazilian trade is invoiced. Besides the prevailing United States dollar (USD), we find that other international currencies and the local currency (BRL) are also used in trade. We find also that in imports a small amount of trade is also invoiced in the exporter\'s noninternationalized local currencies. In this section we also note that the BRL-invoicing share grew during the observed period. Section 5 deals with the BRL-invoiced data. We describe the main trade partners and the main products invoiced in the domestic currency. In this section, we stress that some outcomes of the Brazilian trade analysis challenge some previous findings from the literature, both theoretical and empirical. Section 6 concludes.
Currency internationalization and vehicle currencies Currency internationalization is a process by which the functions of a domestic currency are acknowledged by economic agents beyond the issuing country\'s frontiers. Two of these functions are the medium of exchange and the unit of account. They correspond in the international trade transactions with the currency that denominates the asset exchanged for a good and the currency used to denominate the invoice price of an operation. Although the currency used for invoicing a trade operation and for settling it Bleomycin Sulfate may not be the same, some researchers found that they usually match — the same currency is used in both cases (Friberg and Wilander, 2008; Ito et al., 2013). Following these considerations, the incidence of a currency being used for denominating foreign trade is an indicator of the level of its international acceptance. By choosing a currency to invoice their trade, the exporter and the importer endorse their understanding that the chosen currency is acknowledged as a unit of account for both and confirm it as a medium of exchange. Three literature approaches on vehicle currency choice are summarized by Goldberg and Tille (2008). The first one focuses on financial transactions instead of trade. In polymer approach, transaction costs arising from the currency use are essential to the choice of the currency in which an agent invoices. Transaction costs are primarily associated with currency liquidity characteristic of international financial markets (Swoboda, 1968, 1969). The second approach focuses on relating the invoice currency choice of a product to specific characteristics of its industry. Agents trading products with homogenous characteristics and trading in specific markets would present a higher propensity to point to a single international currency, which allows pricing and trading to occur without adding extra costs (McKinnon, 1979; Krugman, 1980). The third approach relates the invoice currency choice to the currency\'s macroeconomic predictability. Accordingly, an agent chooses the invoice currency in order to minimize the expected revenue volatility (Baron, 1976). In addition to the reasons why an agent chooses to invoice in a particular currency, other core questions about trade invoicing may be summarized in how the invoice currency choice influences the internationality of a currency and how the currency\'s internationality influences agents when choosing a currency to invoice their operations. It is a reasonable assumption that international currencies are more likely to be chosen as invoice currency by two different parties, mainly because of the net externalities effect reported by Flandreau and Jobst (2009). A specific invoice currency is chosen because everyone else made the same choice. Yet an international currency\'s acceptance is a function of its share in international trade payments, as summarized by Wu et al. (2010), who investigated conditions of the currency internationalization process. Therefore, an understanding of the BRL\'s international role and its world positioning relates in part to its use in Brazilian foreign trade, as we describe in this article to register the BRL\'s standing.