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On the Determinants of International Currency Choice: Will the Euro Dominate the World?

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  • Matteo Bobba
  • Andrew Powell
  • Giuseppe Della Corte

Abstract

Money is used as a store of value, a medium of exchange and a unit of account. Most recent analyses of currency choice in an international setting have focused on the denomination of reserves—the store of value role. However, public data are only aggregate and exclude several countries. This paper focuses on currency choice for the unit of account role, employing a detailed database on security issuance across countries, time and currencies. The paper finds a stable relation between currency choice and specific real and financial variables with different specifications for developed and developing countries, as well as evidence for persistence and network externalities. Exploiting the creation of the Euro, the paper finds a large and significant Euro liquidity effect at the cost of the dollar, especially in the early years of the life of the new currency. The estimates suggest that the Euro is making significant progress toward threatening the role of the dollar as the dominant international currency.

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Bibliographic Info

Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4530.

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Date of creation: Jun 2007
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Handle: RePEc:idb:wpaper:4530

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  1. Elias Papaioannou & Richard Portes & Gregorios Siourounis, 2006. "Optimal Currency Shares in International Reserves: The Impact of the Euro and the Prospects for the Dollar," NBER Working Papers 12333, National Bureau of Economic Research, Inc.
  2. Menzie Chinn & Jeffrey Frankel, 2005. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," NBER Working Papers 11510, National Bureau of Economic Research, Inc.
  3. Krugman, Paul, 1980. "Vehicle Currencies and the Structure of International Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 12(3), pages 513-26, August.
  4. Alain Ize & Andrew Powell, 2003. "Prudential Responses to De Facto Dollarization," Business School Working Papers defactodollarization, Universidad Torcuato Di Tella.
  5. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
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Cited by:
  1. Christian Thimann, 2008. "Global Roles of Currencies," International Finance, Wiley Blackwell, vol. 11(3), pages 211-245, December.
  2. Elias Papaioannou & Richard Portes, 2008. "The international role of the euro: a status report," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 317, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Philip R. Lane, 2008. "EMU and Financial Integration," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp272, IIIS.

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