Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Euro May over the Next 15 Years Surpass the Dollar as Leading International Currency

Contents:

Author Info

  • Chinn, Menzie

    (U of Wisconsin)

  • Frankel, Jeffrey

    (Harvard U)

Abstract

The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2025.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://ksgnotes1.harvard.edu/Research/wpaper.nsf/rwp/RWP08-016/$File/rwp_08_016_frankel.pdf
Our checks indicate that this address may not be valid because: 404 Not Found (http://ksgnotes1.harvard.edu/Research/wpaper.nsf/rwp/RWP08-016/$File/rwp_08_016_frankel.pdf [302 Found]--> http://web.hks.harvard.edu/publications/workingpapers/Index.aspx). If this is indeed the case, please notify ()
Download Restriction: no

Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp08-016.

as in new window
Length:
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:ecl:harjfk:rwp08-016

Contact details of provider:
Postal: 79 JFK Street, Cambridge, MA 02138
Fax: 617-496-2554
Web page: http://www.ksg.harvard.edu/research/working_papers/index.htm
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. George S. Tavlas & Yusuru Ozeki, 1991. "The Japanese Yen as an International Currency," IMF Working Papers 91/2, International Monetary Fund.
  2. Gabriele Galati & Philip D. Wooldridge, 2006. "The euro as a reserve currency: a challenge to the pre-eminence of the US dollar?," BIS Working Papers 218, Bank for International Settlements.
  3. Chinn, Menzie David & Frankel, Jeffrey A., 2006. "Will the Euro Eventually Surpass the Dollar As Leading International Reserve Currency?," Santa Cruz Center for International Economics, Working Paper Series qt4hz4n9pb, Center for International Economics, UC Santa Cruz.
  4. Paul R. Krugman, 1984. "The International Role of the Dollar: Theory and Prospect," NBER Chapters, in: Exchange Rate Theory and Practice, pages 261-278 National Bureau of Economic Research, Inc.
  5. Richard Portes & Helene Rey, 1998. "The Emergence of the Euro as an International Currency," NBER Working Papers 6424, National Bureau of Economic Research, Inc.
  6. Rey, Hélène, 1999. "International Trade and Currency Exchange," CEPR Discussion Papers 2226, C.E.P.R. Discussion Papers.
  7. Michael P. Dooley & J. Saul Lizondo & Donald J. Mathieson, 1989. "The Currency Composition of Foreign Exchange Reserves," IMF Staff Papers, Palgrave Macmillan, vol. 36(2), pages 385-434, June.
  8. Black, Stanley W., 1991. "Transactions costs and vehicle currencies," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 512-526, December.
  9. Linda S. Goldberg & Cedric Tille, 2005. "Vehicle currency use in international trade," Staff Reports 200, Federal Reserve Bank of New York.
  10. Detken, Carsten & Hartmann, Philipp, 2000. "The euro and international capital markets," Working Paper Series 0019, European Central Bank.
  11. Barry Eichengreen, 2005. "Sterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competition," NBER Working Papers 11336, National Bureau of Economic Research, Inc.
  12. Carsten Detken & Philipp Hartmann, 2002. "Features of the euro's role in international financial markets," Economic Policy, CEPR & CES & MSH, vol. 17(35), pages 553-569, October.
  13. Rudiger Dornbusch, 1989. "The dollar in the 1990s: competitiveness and the challenges of new economic blocs," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 245-290.
  14. Hartmann, Philipp, 1998. "The Currency Denomination of World Trade after European Monetary Union," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 424-454, December.
  15. Ron Alquist & Menzie D. Chinn, 2002. "Productivity and the Euro-Dollar Exchange Rate Puzzle," NBER Working Papers 8824, National Bureau of Economic Research, Inc.
  16. Detken, Carsten & Hartmann, Philipp, 2000. "The euro and international capital markets," CFS Working Paper Series 2000/09, Center for Financial Studies (CFS).
  17. John F. O. Bilson & Richard C. Marston, 1984. "Exchange Rate Theory and Practice," NBER Books, National Bureau of Economic Research, Inc, number bils84-1.
  18. Yusuru Ozeki & George S. Tavlas, 1992. "The Internationalization of Currencies," IMF Occasional Papers 90, International Monetary Fund.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Der langsame Abschied vom Dollar
    by Tobias Straumann in Never mind the markets on 2014-01-27 04:00:42
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Eichengreen, Barry & Flandreau, Marc, 2009. "The rise and fall of the dollar (or when did the dollar replace sterling as the leading reserve currency?)," European Review of Economic History, Cambridge University Press, vol. 13(03), pages 377-411, December.
  2. Barry Eichengreen & Marc Flandreau, 2010. "The Federal Reserve, the Bank of England and the rise of the dollar as an international currency, 1914-39," BIS Working Papers 328, Bank for International Settlements.
  3. Roland Beck & Sebastian Weber, 2011. "Should Larger Reserve Holdings Be More Diversified?," International Finance, Wiley Blackwell, vol. 14(3), pages 415-444, December.
  4. Jørgen Hansen & Roswitha King & Virmantas Kvedaras, 2011. "The International Reserves Issue in the EMU," Open Economies Review, Springer, vol. 22(1), pages 143-161, February.
  5. Beck, Roland & Rahbari, Ebrahim, 2011. "Optimal reserve composition in the presence of sudden stops," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1107-1127, October.
  6. Elias Papaioannou & Richard Portes, 2008. "The international role of the euro: a status report," European Economy - Economic Papers 317, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  7. Hans Genberg, 2011. "Currency internationalisation: analytical and policy issues," BIS Papers chapters, in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 221-230 Bank for International Settlements.
  8. Eichengreen, Barry & Mehl, Arnaud & Chiţu, Livia, 2012. "When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets," Working Paper Series 1433, European Central Bank.
  9. Édouard Vidon, 2009. "Monnaies de réserve et stabilité financière internationale," Revue d'Économie Financière, Programme National Persée, vol. 94(1), pages 219-232.
  10. Barry Eichengreen & Marc Flandreau, 2012. "The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914–1939," Open Economies Review, Springer, vol. 23(1), pages 57-87, February.
  11. Casimir Dadak, 2011. "Political Economy of the Euro Area Crisis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(5), pages 593-604, December.
  12. Isabella Sima & Camelia Marin & Cristina Tenovici & Elena Nisipeanu, 2012. "Crisis in the Euro Area and the Euro: The Game of Giants - Euro vs. Dollar," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(1), pages 57-64, January.
  13. Eichengreen, Barry & Chiţu, Livia & Mehl, Arnaud, 2014. "Network effects, homogeneous goods and international currency choice: new evidence on oil markets from an older era," Working Paper Series 1651, European Central Bank.
  14. Barry Eichengreen & Marc Flandreau, 2008. "The Rise and Fall of the Dollar, or When Did the Dollar Replace Sterling as the Leading International Currency?," NBER Working Papers 14154, National Bureau of Economic Research, Inc.
  15. Hyoung-kyu Chey, 2013. "The Concepts, Consequences, and Determinants of Currency Internationalization," GRIPS Discussion Papers 13-03, National Graduate Institute for Policy Studies.
  16. Fritz Breuss & Werner Roeger & Jan in 't Veld, 2008. "Global Impact of a Shift in Foreign Reserves to Euros," European Economy - Economic Papers 345, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ecl:harjfk:rwp08-016. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.