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Did the Structure of Trade and Foreign Debt Affect Reserve Currency Composition? Evidence form Interwar Japan

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Author Info

  • Mariko Hatase

    (Director and Senior Economist, History Section, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mariko.hatase@boj.or.jp))

  • Mari Ohnuki

    (Associate Director and Economist, History Section, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mari.oonuki@boj.or.jp))

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    Abstract

    Historical experience is often invoked in the modern debate on competition among reserve currencies, yet little is known about quantitative aspects or institutional features of reserve management. By drawing on newly obtained data on foreign exchange reserves, especially those broken down by currency, this paper explores the competition between the British pound sterling and the U.S. dollar for the status of leading reserve currency in Japan during the interwar period. We find that competition between these two currencies remained undecided and that their relative status alternated repeatedly. Historical materials and the results of econometric analysis suggest that the key factors explaining a choice of reserve currencies are trade volumes and the currency denomination of external debt. The latter criteria supported maintaining sterlingfs status as a reserve currency for the interwar period, reflecting its considerable share in debt service generated through issues that had been launched when London was the sole international market. The stability of potential reserve currencies is shown to be crucial as well. We also find evidence of institutional factors, which include taxation, foreign exchange controls, and restrictions on financial activities.

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    Bibliographic Info

    Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-15.

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    Date of creation: Jun 2009
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    Handle: RePEc:ime:imedps:09-e-15

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    Keywords: Foreign Exchange Reserves; Gold Exchange Standard; Exchange Rate; Trade Strucutre; Debt Structure; Japan;

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