Grassman's Law

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Grassman's Law (Grassmann's Law) goes back to the Swedish economist Sven Grassman (1940-1992). The approach was published by him in 1973 in a paper in the Journal of International Economics . In this, Grassman contradicts the prevailing view that the US dollar was the dominant currency in international foreign trade. Foreign trade transactions, on the other hand, are invoiced to around two thirds in the exporter's currency and a quarter in the importer's currency . Currencies from third countries only play a subordinate role.

Grassman demonstrates the findings in his work using data sets on Swedish and Danish foreign trade . The high share of the US dollar in global payment transactions in foreign trade of around 21 percent resulted from the almost correspondingly high share of the US economy in global foreign trade. The choice of the invoice currency in foreign trade can, however, also be influenced by the availability of loans and bank services. The great importance of the US dollar and the British pound in international payment transactions was therefore at least partly due to the important role played by American and British banks in financing international trade.

The choice of the appropriate invoicing currency in foreign trade can, however, also be influenced by other aspects. Döhring (2008) describes various transactions in which the use of third currencies as so-called vehicle currencies can be optimal. For example, some exporters invoice their own prices in the currency used by their main competitors. This can be useful in a situation in which your own currency is subject to strong fluctuations. In the event of a long-term appreciation of one's own currency, the price competitiveness compared to alternative providers will then deteriorate .

With the emergence of the European Monetary Union , the importance of the euro as an invoicing currency increased significantly. For exporters from the euro area and the rest of the EU, the euro is the most important invoicing currency today. According to Döhring (2008), the majority of the euro member countries invoice between 50 and 61 percent of their exports to countries outside the euro area in euros.

literature

  • Björn Döhring (2008): Hedging and invoicing strategies to reduce exchange rate exposure: a euro-area perspective. European Commission - Directorate-General for Economic and Financial Affairs, Economic Papers 229.
  • Sven Grassman (1973): A fundamental symmetry in international payment patterns. In: Journal of International Economics. 3, 105-116.
  • Philipp Hartmann: Currency Competition and Foreign Exchange Markets: the Dollar, the Yen and the Euro . Cambridge University Press 1998, ISBN 0521632730 , p. 98

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