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International Currencies and Capital Allocation

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  • Maggiori, Matteo
  • Neiman, Brent
  • Schreger, Jesse

Abstract

We establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets. Using a dataset of $27 trillion in security-level investment positions, we demonstrate that investor holdings are biased toward their own currencies to such an extent that each country holds the bulk of all debt securities denominated in their own currency, even those issued by foreign borrowers in developed countries. Surprisingly, currency is such a strong predictor of the nationality of a security's holder that the nationality of the issuer - to date, the most powerful predictor in a voluminous literature on cross-border portfolios - adds very little explanatory power. While large firms issue bonds in foreign currency and borrow from foreigners, the vast majority of firms issue only in local currency and do not directly access foreign capital. These patterns hold broadly across countries with the exception of countries, like the United States, that issue an international currency. The global willingness to hold the US dollar means that even smaller US firms that borrow exclusively in dollars have little difficulty borrowing from abroad. Global portfolios shifted sharply away from the euro and toward the dollar starting with the 2008 financial crisis, further cementing the dollar's international role and potentially amplifying the benefit that its status brings to the US.

Suggested Citation

  • Maggiori, Matteo & Neiman, Brent & Schreger, Jesse, 2018. "International Currencies and Capital Allocation," CEPR Discussion Papers 12973, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12973
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital Flows; Exorbitant Privilege; Home Bias; reserve currencies;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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