A Country Portfolio Approach to Solving Currency Invoicing

Abstract

This paper develops a simple framework for computing equilibrium shares of trade currency invoicing in open economy dynamic stochastic general equilibrium models. The solution method follows closely to Devereux and Sutherland [2011]'s method in solving portfolio choice by applying information from second-order approximations of equilibrium conditions to solving zero-order portfolio shares. The framework is flexible enough to be extended to a Rotemberg sticky price model. To illustrate the approach, I use a simple symmetric two-country model and show that the results are consistent with existing theoretical findings on how monetary policy affects exchange rate pass-through.