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

Flandreau, Marc; Jobst, Clemens

doi:10.1111/j.1468-0297.2009.02219.x

“…46 Flandreau and Jobst (2009) argue that in a credible gold standard the short-term interest differential is a very good measure of relative market liquidity. We define US market liquidity as the differential between the US short term interest rate and the corresponding sterling rate (i.e.…”

Section: Robustnessmentioning

confidence: 99%

When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets

Chițu¹,

Eichengreen²,

Mehl³

2012

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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 EconStor may AbstractThis paper offers new evidence on the emergence of the dollar as the leading international currency, focusing on its role as currency of denomination in global bond markets. We show that the dollar overtook sterling much earlier than commonly supposed, as early as in 1929.Financial market development appears to have been the main factor helping the dollar to surmount sterling's head start. The finding that a shift from a unipolar to a multipolar international monetary and financial system has happened before suggests that it can happen again. That the shift occurred earlier than commonly believed suggests that the advantages of incumbency are not all they are cracked up to be. And that financial deepening was a key determinant of the dollar's emergence points to the challenges facing currencies aspiring to international status.Key words: foreign public debt, international monetary system, international currencies, role of the US dollar, network externalities, path dependency Non-technical summaryThe global economic and financial crisis has lent new impetus to discussions of the future of the international monetary and financial system. Some advocate moving to a multipolar system in which the US dollar shares its international currency role with the euro, the Chinese renminbi and/or the IMF's Special Drawing Rights. At the Cannes Summit of November 2011, G20 Leaders committed in this respect to taking "concrete steps" to ensure that the international monetary system reflects "the changing equilibrium and the emergence of new international currencies". Some observers expect this change to develop spontaneously, as a natural result of the declining economic and financial dominance of the United States and the increasingly multipolar nature of the global economy, together with the advent of the euro and gradual internationalization of the renminbi. Sceptics object that prospect of a shift to a multipolar monetary and financial system is in fact remote. If it occurs, such a transition would take many decades to complete, in their view.The view that a shift to a multipolar system is unlikely to occur rapidly is rooted in theoretical models where international currency status is characterized by network externalities. These give rise to lock-in and inertia, which benefit the incumbent. Such models rest, in turn, on a conventional historical narrative, epitomized by Triffin (1960), according to which it took betwee...

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“…Second, the evidence in Flandreau and Jobst (2009) is inconsistent with strongly increasing returns. The authors construct a model of the pre-1914 international monetary system that allows for strategic externalities.…”

mentioning

confidence: 88%

The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914–1939

Eichengreen

¹

,

Flandreau

²

2011

Self Cite

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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. This paper provides new evidence on the rise of the dollar as an international currency, focusing on its role in the conduct of trade and the provision of trade credit. We show that the shift to the dollar occurred much earlier than conventionally supposed: during and immediately after World War I. Not just market forces but also policy support -the Fed in its role as market maker -was important for the dollar's overtaking of sterling as the leading international currency. On balance, this experience challenges the popular notion of international currency status as being determined mainly by market size. It suggests that the popular image of strongly increasing returns and pervasive network externalities leaving room for only one monetary technology is misleading. Terms of use: Documents in

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“…A crucial characteristic of foreign exchange bulletins -handwritten, semi-printed or published bulletins-is that certain centers are quoted but not others. Flandreau et al (2009) argue that the existence or not of a price quotation gives a reasonably good indication for the liquidity of the underlying market because it reveals the existence of a sufficiently large demand and supply to warrant the posting of exchange rates.…”

Section: The Geography Of Money Before the Industrial Revolutionmentioning

confidence: 99%

Money Markets and Exchange Rates in Preindustrial Europe

Noguès-Marco

¹

2018

Handbook of the History of Money and Currency

2

0

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This chapter focuses on money markets and exchange rates in preindustrial Europe. The foreign exchange market was mostly based on bills of exchange, the instrument used to transfer money and provide credit between distant centers in pre-industrial Europe. In this chapter, first I explain bill of exchange operations, money market integration, usury regulations and circumventions to hide the market interest rate as well as the evolution of bills of exchange in history, focusing mainly on the most relevant features generalized during the first half of the 17 th century: endorsement and the joint liability rule, which facilitated the full expansion of the foreign exchange market beyond personal networks. Then, I describe the European geography of money in the mid-18 th century, characterized by a very high degree of multilateralism with the triangle of Amsterdam, London and Paris as the backbone of the European settlement system. Finally, I measure the cost of capital and relate it to liquidity. I show evidence of interest rates in the 18 th century for Amsterdam, London, Paris and Cadiz.While Amsterdam, London and Paris presented low and similar interest rates, Cadiz had higher interest rates, mostly being double the cost of capital. These results seem to show a high inverse correlation between liquidity and interest rates, suggesting that the share in international trade of European centers might have been a powerful driver of international monetary leadership. While more empirical evidence and further research is needed, this approach opens the scope of the analysis beyond the national institutional explanation.

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

Cited by 63 publications

References 44 publications

When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets

When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets

The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914–1939

Money Markets and Exchange Rates in Preindustrial Europe

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