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International Medium of Exchange: Privilege and Duty

Author

Listed:
  • Ryan Chahrour

    (Boston College)

  • Rosen Valchev

    (Boston College)

Abstract

The United States enjoys an “exorbitant privilege” that allows it to borrow at especially low interest rates. Meanwhile, the dollarization of world trade appears to shield the U.S. from international disturbances. We provide a new theory that links dollarization and exorbitant privilege through the need for an international medium of exchange. We consider a two-country world where international trade happens in decentralized matching markets, and must be collateralized by safe assets — a.k.a. currencies — issued by one of the two countries. Traders have an incentive to coordinate their currency choices and a single dominant currency arises in equilibrium. With small heterogeneity in traders’ information, the model delivers a unique mapping from economic conditions to the dominant currency. Nevertheless, the model delivers a dynamic multiplicity: in steady-state either currency can serve as the international medium of exchange. The economy with the dominant currency enjoys lower interest rates and the ability to run current account deficits indefinitely. Currency regimes are stable, but sufficiently large shocks or policy changes can lead to transitions, with large welfare implications.

Suggested Citation

  • Ryan Chahrour & Rosen Valchev, 2018. "International Medium of Exchange: Privilege and Duty," 2018 Meeting Papers 317, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:317
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    File URL: https://economicdynamics.org/meetpapers/2018/paper_317.pdf
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    References listed on IDEAS

    as
    1. Mathieu Taschereau-Dumouchel & Edouard Schaal, 2015. "Coordinating Business Cycles," 2015 Meeting Papers 178, Society for Economic Dynamics.
    2. Camila Casas & Federico J. Díez & Gita Gopinath & Pierre-Olivier Gourinchas, 2016. "Dominant Currency Paradigm," NBER Working Papers 22943, National Bureau of Economic Research, Inc.
    3. Marcela Eslava & James Tybout & David Jinkins & C. Krizan & Jonathan Eaton, 2015. "A Search and Learning Model of Export Dynamics," 2015 Meeting Papers 1535, Society for Economic Dynamics.
    4. James Tybout & David Jinkins & Daniel Yi Xu & Jonathan Eaton, 2016. "Two-sided Search in International Markets," 2016 Meeting Papers 973, Society for Economic Dynamics.
    5. Linda S. Goldberg, 2011. "The international role of the dollar: Does it matter if this changes?," Staff Reports 522, Federal Reserve Bank of New York.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. International Medium of Exchange: Privilege and Duty
      by Christian Zimmermann in NEP-DGE blog on 2018-10-10 14:52:26

    Citations

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    Cited by:

    1. Maggiori, Matteo & Neiman, Brent & Schreger, Jesse, 2018. "International Currencies and Capital Allocation," CEPR Discussion Papers 12973, C.E.P.R. Discussion Papers.
    2. 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.
    3. Eren, Egemen & Malamud, Semyon, 2018. "Dominant Currency Debt," CEPR Discussion Papers 13391, C.E.P.R. Discussion Papers.
    4. Rosen Valchev, 2017. "Bond Convenience Yields and Exchange Rate Dynamics," Boston College Working Papers in Economics 943, Boston College Department of Economics.
    5. 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:

    • F3 - International Economics - - International Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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