The “exorbitant privilege” and “exorbitant duty” of the United States in the international monetary system: implications for developing countries

The international monetary system may be viewed as a global insurance system, where the United States enjoys the “exorbitant privilege” of a positive yield differential on its external assets and liabilities during normal times, in exchange for the “exorbitant duty” of valuation losses in the form of wealth transfers to the rest of the world during crisis periods. Evidence for 76 economies and 1995–2019 indicates that some other major developed economies also enjoy an exorbitant privilege, though without suffering an exorbitant duty. By contrast, most developing economies neither have an exorbitant privilege nor benefit from wealth transfers. Developing economies as a group recorded negative return differentials and valuation losses during 2010–2019, implying a total return differential of about minus three percentage points between developing and developed economies and an annual average resource transfer from developing economies of about $800bn, or 3.3 per cent of their GDP. Econometric analysis linking crisis insurance strategies and yield differentials indicates that permanent swap arrangements, reserve holdings and regional monetary arrangements can contain negative yield differentials. Developed economies could make part of past resource transfers available to developing economies to finance recovery from the COVID-19 crisis and achieving the 2030 Agenda for Sustainable Development.