The ‘exorbitant privilege’ of an international-currency status: theory and evidence

A strong international-currency status may provide the issuing country an ‘exorbitant privilege’. This privilege can take several forms, ranging from an ‘excess return’ on the country’s gross external assets over liabilities, to an almost unlimited capacity to issue internationally accepted liabilities to purchase its imports and service its foreign debt. At the same time, this ‘exorbitant privilege’ can also entail an ‘exorbitant duty’. This is because in times of global stress the issuing country is expected to supply its international currency in large amounts, and the exchange rate of its currency may appreciate as capital flows to safe havens. This section compares, for a selected group of countries and areas, including the euro area and the US, their possible ‘excess return’ on foreign assets over liabilities, as well as changes in global demand for their liquid assets in times of global stress. After a brief literature review, the empirical part highlights that the ‘excess return’ has been modest for the euro area so far, as well as for most other countries in the sample. The section then illustrates econometrically that periods of global stress have induced significant increases in the demand for liquid assets issued by the US Finally, it shows notable differences in the performances of euro-area Member States in terms of excess return.