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Banking, Trade, and the making of a Dominant Currency

Author

Listed:
  • Gita Gopinath
  • Jeremy C. Stein

Abstract

We explore the interplay between trade invoicing patterns and the pricing of safe assets in different currencies. Our theory highlights the following points: 1) a currency’s role as a unit of account for invoicing decisions is complementary to its role as a safe store of value; 2) this complementarity can lead to the emergence of a single dominant currency in trade invoicing and global banking, even when multiple large candidate countries share similar economic fundamentals; 3) firms in emerging-market countries endogenously take on currency mismatches by borrowing in the dominant currency; 4) the expected return on dominant-currency safe assets is lower than that on similarly safe assets denominated in other currencies, thereby bestowing an “exorbitant privilege” on the dominant currency. The theory thus provides a unified explanation for why a dominant currency is so heavily used in both trade invoicing and in global finance.

Suggested Citation

  • Gita Gopinath & Jeremy C. Stein, 2018. "Banking, Trade, and the making of a Dominant Currency," NBER Working Papers 24485, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24485
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    File URL: http://www.nber.org/papers/w24485.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Abbassi, Puriya & Bräuning, Falk, 2018. "The pricing of FX forward contracts: micro evidence from banks’ dollar hedging," Working Papers 18-6, Federal Reserve Bank of Boston.
    2. repec:aea:apandp:v:109:y:2019:p:521-26 is not listed on IDEAS
    3. Matteo Maggiori & Brent Neiman & Jesse Schreger, 2019. "The Rise of the Dollar and Fall of the Euro as International Currencies," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 521-526, May.
    4. Bryan Hardy & Felipe Saffie, 2019. "From carry trades to trade credit: financial intermediation by non-financial corporations," BIS Working Papers 773, Bank for International Settlements.
    5. Pierre-Olivier Gourinchas & Hélène Rey & Maxime Sauzet, 2019. "The International Monetary and Financial System," NBER Working Papers 25782, National Bureau of Economic Research, Inc.
    6. Chen, Natalie & Chung, Wanyu & Novy, Dennis, 2018. "Vehicle Currency Pricing and Exchange Rate Pass-Through," CEPR Discussion Papers 13085, C.E.P.R. Discussion Papers.
    7. Fischer, Andreas M & Yesin, Pinar, 2019. "Foreign currency loan conversions and currency mismatches," CEPR Discussion Papers 13923, C.E.P.R. Discussion Papers.
    8. Stavrakeva, Vania & Tang, Jenny, 2018. "The dollar during the global recession: US monetary policy and the exorbitant duty," Working Papers 18-10, Federal Reserve Bank of Boston.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F0 - International Economics - - General
    • G0 - Financial Economics - - General

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