On the Determinants of International Currency Choice: Will the Euro Dominate the World?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Washington, DC 20577The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf.This paper may be freely reproduced provided credit is given to the Research Department, Inter-American Development Bank.The Research Department (RES) produces a quarterly newsletter, IDEA (Ideas for Development in the Americas), as well as working papers and books on diverse economic issues. To obtain a complete list of RES publications, and read or download them please visit our web site at: http://www.iadb.org/res. 3 Abstract 1Money is used as a store of value, a medium of exchange and a unit of account. Most recent analyses of currency choice in an international setting have focused on the denomination of reserves-the store of value role. However, public data are only aggregate and exclude several countries. This paper focuses on currency choice for the unit of account role, employing a detailed database on security issuance across countries, time and currencies. The paper finds a stable relation between currency choice and specific real and financial variables with different specifications for developed and developing countries, as well as evidence for persistence and network externalities. Exploiting the creation of the Euro, the paper finds a large and significant Euro liquidity effect at the cost of the dollar, especially in the early years of the life of the new currency. The estimates suggest that the Euro is making significant progress toward threatening the role of the dollar as the dominant international currency.

The Empirics of International Currencies: Network Externalities, History and Persistence

“…Researchers have studied the effects of factors such as the size of the issuing country and its record of price‐level and exchange‐rate stability (Dooley et al , 1989; Eichengreen and Frankel, 1996; Eichengreen, 1999; Eichengreen and Mathieson, 2001; Eichengreen, 2005; Chinn and Frankel, forthcoming). Others have looked at the currency of denomination of international bond issues (Eichengreen et al, 2005; Cohen, 2005; Bobba et al , 2007). Finally, Goldberg and Tille (2005) use data on the choice of invoicing currency for 24 countries.…”

“…This represents both a departure from and an original contribution to existing research. While network externalities are a basic feature of theoretical models of international currencies, they are neglected from empirical studies or handled by inclusion of lagged endogenous variables (Bobba et al , 2007; Chinn and Frankel, forthcoming).…”

Clamoring for greenbacks: Explaining the resurgence of the U.S. dollar in international debt

“…In that sense, Hausmann and Panizza (2003) and Bobba, Della Corte, and Powell (2007) also find that larger economies or economies with greater global trade presence tend to rely less on foreign currencies, that is, more on their domestic currencies for international‐debt issuance. Hausmann and Panizza (2003) find that imposing capital controls would increase the share of the domestic currency in domestic debt, thereby lowering the degree of “original sin”, which is in line with our finding.…”

Global Roles of Currencies

“…In particular, by excluding the domestic bond market and the equity market, the international debt market does not reflect important motives of international currency use and overlooks key aspects of international financial integration. 3 Such motives are more related to the size and structure of domestic financial markets and the underlying macroeconomy (Bobba et al, 2007). Table 3 here However, the established concept of the international use of currency is highly imprecise even in measuring cross-border use.…”