Theories of International Currencies and the Future of the World Monetary Order1

Abstract

Chey, Hyoung‐kyu. (2012) Theories of International Currencies and the Future of the World Monetary Order. International Studies Review, doi: 10.1111/j.1468‐2486.2012.01104.x The international standings of currencies form a principal characteristic of the international monetary order, shaping the world economic and political system by influencing the economic and political relationships among countries. This paper provides a systematic review of the literature on international currencies, encompassing both economics and political science, with the aim of providing useful groundwork to help develop a better analytical framework for the study of international currency standing. In particular, this paper discusses the international currency concept, the benefits and costs of issuing an international currency, and the determinants of international currency standing. It also assesses conflicting prospects for the future of the US dollar as the world’s key currency, addressing the likelihoods of further internationalization of the euro and the renminbi, the dollar’s main potential rivals. It in addition calls attention to certain political economy factors as salient issues for the future study of international currency standing.

The Concepts, Consequences, and Determinants of Currency Internationalization

“…38 All of these factors are expected to reduce the likelihood of the renminbi posing a serious threat to the dollar in the foreseeable future. 35 See, for example, Chey (2012a;2013), Pittaluga and Seghezza (2012) and Posen (2008). 36 See Cohen (2009a;2009c), Cooper (2009; (2008), Pittaluga and Seghezza (2012) and Posen (2008).…”

“…All of the countries that peg their exchange rates to the euro are EU membership candidates, for instance, with the exceptions of those in the CFA franc zone whose pegs to the euro are based on their foreign policy relations with France, their former colonizer (Posen 2008: 92). 37 See, for example, Chey (2012a;2013), Cohen (2009c;, Cooper (2009;, Dobson andMasson (2009), Eichengreen (2009a), Helleiner (2009), Helleiner andMalkin (2012), IMF (2010), Lee (2010), Wu (2009) and Wu et al (2010). 38 Chey (2013) points out that the US economy was more than twice as large as that of the UK in the early 1910s, when the dollar began emerging as a consequential international currency, and had grown to more than four times as big by the late 1920s when the dollar replaced sterling for the first time as leading international currency.…”

Bringing the Central Bank into the Study of Currency Internationalization: Monetary Policy, Independence, and Internationalization

“…First, capital account liberalization requires a shift to a flexible exchange rate system, as a country adopting a fixed exchange rate regime despite maintenance of an open capital account risks speculative capital attacks (Chey, 2012). As discussed above, under the 'unholy trinity' framework, if there is an open capital account in place domestic monetary policy autonomy tends to be amplified with the adoption of flexible exchange rates.…”

“…It should be stressed, however, that this risk tends to intensify in the later stages of the life cycle of an international currency, when that currency loses its market appeal. In the early stages of an international currency's life cycle-in other words when its internationalization is on rise-demand for the currency is growing, and the risk of its drastic liquidation is therefore not high (Chey, 2012(Chey, , 2014Cohen, 2012aCohen, , 2015Helleiner and Malkin 2012). Moreover, in a phenomenon that Valéry Giscard d'Estaing, French Minister of Economy and Finance in the 1960s, once criticized as the 'exorbitant privilege' 19 In fact, there do not appear to be any significant differences in monetary policy autonomy among the United States, the eurozone, the United Kingdom and Japan, even despite the substantial differences in the degrees of their currencies' internationalizations (Papaioannou and Portes, 2008: 70).…”

“…of the United States (Eichengreen, 2011: 4), the state issuing a dominant international currency can finance its balance-of-payments deficits by printing its currency, insofar as foreigners are willing to hold it. And as a result its capacity to evade the effects of market discipline on its monetary policy strengthens when the internationalization of its currency is on the rise, meaning an increase in its monetary policy autonomy (Chey, 2012(Chey, , 2014Cohen, 2012aCohen, , 2015Helleiner and Malkin, 2012).…”