Oil Currency and the Dollar Standard: A Simple Analytical Model of an International Trade Currency∗

It is widely accepted that the US dollar is the central reference currency for international trade pricing in final goods. At the same time, the dollar is the main invoicing currency for primary commodities. This paper links these two observations within a stylized theoretical framework, and shows how this may be used to obtain a quantitative estimate of the gain to the US economy from the use of the US dollar as a reference currency. With dollar invoicing of primary commodities, US firms bear less exchange rate risk than foreign firms when facing primary commodity price shocks (even when commodity prices are fully flexible). As a result of this asymmetry, all firms in the world will set their export prices in US dollars. This implies a dollar standard in international goods pricing. The paper derives a simple analytical formula to calculate the gains to the representative US household from the dollar standard. We find that the gains are extremely small. JEL classification: F3, F4