The Political Economy of Reducing the United States Dollar`s Role as a Global Reserve Currency
AbstractMany have argued that the major source of the existing global macroeconomic imbalances are the twin deficits of the United States (US). However, there is still a debate about whether the global imbalances indeed pose a significant threat to the world economy. This matter is settled by arguing that the global imbalances acted as a "handmaiden" to the 2008 financial crisis. One way to reduce global imbalances is to reform the international monetary system and reduce the role of the US dollar as a reserve currency. Robert Triffin was one of those critical of this "exorbitant" privilege granted to the US, which makes it both a system maker and privilege taker. The Triffin Dilemma captures the fundamental instability that underlies the dollar reserve system. However, there are major obstacles to this proposal. Some analysts including Triffin cited the US security umbrella as the primary reason the US and its major allies would want to retain the role of the dollar in global trade and finance despite the underlying inequities in the system. This is related to the imbalance in global governance which is largely US-centric. The imbalance in global governance is also reflected in the dominance of the US financial system brought about by the "first-mover advantage". Because of the inertia brought about by the imbalance in global governance, economic arguments to reform the international monetary system are likely to be trumped by political reality. The paper analyzes whether current efforts in East Asia in terms of financial and monetary cooperation and rebalancing of economic growth could significantly mitigate the adverse impacts of a global system that will still be dominated by the US dollar in the foreseeable future. It also explains why the People`s Republic of China (PRC) is unlikely to make significant unilateral adjustments to reduce global macroeconomic imbalances.
Download InfoIf 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.
Bibliographic InfoPaper provided by Philippine Institute for Development Studies in its series Discussion Papers with number DP 2011-13.
Date of creation: 2011
Date of revision:
reserve currency; fiduciary system; global imbalances; Triffin Dilemma;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-18 (All new papers)
- NEP-IFN-2012-01-18 (International Finance)
- NEP-MON-2012-01-18 (Monetary Economics)
- NEP-SEA-2012-01-18 (South East Asia)
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.:
- Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008.
"Financial Crash, Commodity Prices and Global Imbalances,"
NBER Working Papers
14521, National Bureau of Economic Research, Inc.
- Gourinchas, Pierre-Oliver & Farhi, Emmanuel & Caballero, Ricardo J., 2008. "Financial Crash, Commodity Prices, and Global Imbalances," Scholarly Articles 3229095, Harvard University Department of Economics.
- Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2008. "Financial Crash, Commodity Prices and Global Imbalances," CEPR Discussion Papers 7064, C.E.P.R. Discussion Papers.
- Brahmbhatt, Milan & Canuto, Otaviano & Ghosh, Swati, 2010. "Currency Wars Yesterday and Today," World Bank - Economic Premise, The World Bank, issue 43, pages 1-6, December.
- Richard N. Cooper, 2007. "Living with Global Imbalances," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(2), pages 91-110.
- Serven, Luis & Nguyen, Ha, 2010. "Global imbalances before and after the global crisis," Policy Research Working Paper Series 5354, The World Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Aniceto Orbeta).
If references are entirely missing, you can add them using this form.