The current international monetary system with the U.S. dollar as a key currency is considered as the background of the U.S. dollar liquidity shortage during the global financial crisis. However, once facing a U.S. dollar liquidity shortage or crisis, financial institutions are likely to avoid their overdependence on the U.S. dollar. This implies that the international monetary system with the U.S. dollar as a key currency may be changed, especially during the global financial crisis even though key currencies show inertia due to network externalities in using international currencies. In this paper, we focus on the effects of both the global financial crisis and the euro zone crisis on the position of the U.S. dollar as a key currency in the current international monetary system. We base this on a theoretical framework in Ogawa and Sasaki (1998) in which a money-in-the-utility model is used to take into account the U.S. dollar's functions as both a medium of exchange and a store of value in the international currency competition. A parameter on the real balance of the U.S. dollar or its contribution to utility in the model is focused on, analyzing empirically whether both the global financial crisis and the euro zone crisis have changed its contribution to utility. One of the main empirical results from our models is that the contribution of the U.S. dollar to utility decreased during the global financial crisis. This corresponds to a period when financial institutions faced liquidity shortages from mid 2007 to late 2008. U.S. dollar liquidity shortage may have decreased the contribution of the U.S. dollar to utility.
In previous studies, we estimated a time series of coefficients on five international currencies (the US dollar, the euro, the Japanese yen, the British pound, and the Swiss franc) in a utility function. We call the coefficients utilities of international currencies. The time series show that the utility of the US dollar as an international currency has remained in the first position in the changing international monetary system despite of the fact that the euro was created as a single common currency for European countries. On one hand, the utility of the Japanese yen has been declining as an international currency. In this paper, we investigate what determines the utility of international currencies. We use a dynamic panel data model to analyze the issue with Generalized Method of Moments (GMM). Specifically, liquidity shortage in terms of an international currency means that it is inconvenient for economic agents to use the relevant currency for international economic transactions. In other words, liquidity shortages might reduce the utility of an international currency. In this analysis we focus on liquidity premium which represents a liquidity shortage in terms of an international currency. Our empirical results showed not only inertia in terms of change but also the impact of a liquidity shortage in an international currency on the utility of the relevant international currency.
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