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Currency Dominance Is Not Forever: Some Insights from a Non-Linear Dynamic Model

Author

Listed:
  • Michael D. Bordo
  • Cécile Bastidon

Abstract

We propose stress tests based on an original International Monetary System (IMS) model with regime switchings. The model is calibrated for nine reference currencies from the beginning of the Classical Gold Standard to the present. Regime switchings in currency dominance are related to combinations of conditions on a multidimensional environment variable that includes five classes of shocks: technology; development; monetary, financial and fiscal institutions; democracy and conflicts; and the regulatory environment. We provide an original database of events for these five classes of shocks, which is used for calibration. The calibration highlights the important role of the democracy and conflicts component in regime switchings. The calibrated model is then used to perform stress tests on the current prospects of currency dominance for a broad set of scenarios. A salient result from the scenarios we tested is that the dominance of the US dollar is at most marginally affected. No other currency emerges as a major player, suggesting strong inertia in the system’s current centripetal dynamics.

Suggested Citation

  • Michael D. Bordo & Cécile Bastidon, 2026. "Currency Dominance Is Not Forever: Some Insights from a Non-Linear Dynamic Model," NBER Working Papers 35647, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35647
    Note: ME
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    More about this item

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • N2 - Economic History - - Financial Markets and Institutions

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