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International Currency Dominance

Author

Listed:
  • Joseph Abadi

    (Federal Reserve Bank of Philadelphia)

  • Jesús Fernández-Villaverde

    (University of Pennsylvania, NBER, and CEPR)

  • Daniel Sanches

    (Federal Reserve Bank of Philadelphia)

Abstract

We present a micro-founded monetary model of the world economy to study international currency competition. Our model features “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the international monetary system’s dynamics under several counterfactual scenarios.

Suggested Citation

  • Joseph Abadi & Jesús Fernández-Villaverde & Daniel Sanches, 2026. "International Currency Dominance," PIER Working Paper Archive 26-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:26-003
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    More about this item

    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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