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International energy trade and inflation dynamics: The role of invoicing currency use during the low carbon transition

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  • Qiao, Hui
  • Qin, Ping
  • Liu, Yang
  • Yang, Yugang

Abstract

In most international energy trades, the US dollar is the invoicing currency. Our empirical and theoretical analysis examines how this affects inflation dynamics in energy trade. Empirical results reveal that countries’ with higher shares of trade invoiced in dollars would experience more inflation in their energy sector, primarily because of exchange rate fluctuations. Theoretical modeling, based on a new open economy Keynesian framework, demonstrates that when all products are priced in US dollars, imported inflation varies with exchange rates. We observe that the dominant issuer’s monetary policy has greater spillover effects than non-dominant countries. Furthermore, in a counterfactual analysis, we consider invoicing conventional energy products in dollars while invoicing renewable energy products in alternative currencies. The results highlight two benefits of currency coordination in renewable energy products: a domestic monetary policy would be more effective, and the foreign monetary policy produces fewer spillovers to domestic inflation.

Suggested Citation

  • Qiao, Hui & Qin, Ping & Liu, Yang & Yang, Yugang, 2023. "International energy trade and inflation dynamics: The role of invoicing currency use during the low carbon transition," Energy Economics, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:eneeco:v:128:y:2023:i:c:s014098832300676x
    DOI: 10.1016/j.eneco.2023.107178
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    1. Zhang, Long & Padhan, Hemachandra & Singh, Sanjay Kumar & Gupta, Monika, 2024. "The impact of renewable energy on inflation in G7 economies: Evidence from artificial neural networks and machine learning methods," Energy Economics, Elsevier, vol. 136(C).

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    More about this item

    Keywords

    Energy trade; Dominant-currency pricing; Inflation;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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