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On the Determinants of International Currency Choice: Will the Euro Dominate the World?

Author

Listed:
  • Matteo Bobba
  • Andrew Powell
  • Giuseppe Della Corte

Abstract

Money is used as a store of value, a medium of exchange and a unit of account. Most recent analyses of currency choice in an international setting have focused on the denomination of reserves—the store of value role. However, public data are only aggregate and exclude several countries. This paper focuses on currency choice for the unit of account role, employing a detailed database on security issuance across countries, time and currencies. The paper finds a stable relation between currency choice and specific real and financial variables with different specifications for developed and developing countries, as well as evidence for persistence and network externalities. Exploiting the creation of the Euro, the paper finds a large and significant Euro liquidity effect at the cost of the dollar, especially in the early years of the life of the new currency. The estimates suggest that the Euro is making significant progress toward threatening the role of the dollar as the dominant international currency.

Suggested Citation

  • Matteo Bobba & Andrew Powell & Giuseppe Della Corte, 2007. "On the Determinants of International Currency Choice: Will the Euro Dominate the World?," Research Department Publications 4530, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:4530
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    References listed on IDEAS

    as
    1. Papaioannou, Elias & Portes, Richard & Siourounis, Gregorios, 2006. "Optimal currency shares in international reserves: The impact of the euro and the prospects for the dollar," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 508-547, December.
    2. Krugman, Paul, 1980. "Vehicle Currencies and the Structure of International Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(3), pages 513-526, August.
    3. Menzie Chinn & Jeffrey A. Frankel, 2007. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 283-338 National Bureau of Economic Research, Inc.
    4. Barry J. Eichengreen & Donald J Mathieson, 2000. "The Currency Composition of Foreign Exchange Reserves; Retrospect and Prospect," IMF Working Papers 00/131, International Monetary Fund.
    5. Alain Ize & Andrew Powell, 2005. "Prudential Responses to de facto Dollarization," Journal of Economic Policy Reform, Taylor & Francis Journals, pages 241-262.
    6. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
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    Citations

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    Cited by:

    1. Christian Thimann, 2008. "Global Roles of Currencies," International Finance, Wiley Blackwell, vol. 11(3), pages 211-245, December.
    2. Philip R. Lane, 2008. "EMU and Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp272, IIIS.
    3. Jean Pisani-Ferry & Xavier Debrun & André Sapir, 2008. "Government Size and Output Volatility; Should We Forsake Automatic Stabilization?," IMF Working Papers 08/122, International Monetary Fund.

    More about this item

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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