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

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 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...

History, Gravity and International Finance

“…We found evidence of a history effect in trade not unlike that in finance. This is in line with the findings of Eichengreen and Irwin (1998), who utilized data for 1928 This is available for a smaller subset of countries from Chiţu, Eichengreen and Mehl (2012). Arguably, this is an imperfect measure of the true amounts of bonds outstanding, given that it does not include private bonded debt.…”

Global Financial Cycles and Risk Premiums

“…During the interwar years, the U.S. became the world's most important financial center according to some metrics, while the U.K. retained this title until WW2 according to others (see Chiţu et al, 2014). Hence, we construct R c as the average of U.S. and U.K.…”

Mars or Mercury? The Geopolitics of International Currency Choice

“…Our basic specification follows previous literature (see e.g. Frankel 2007, 2008;Li and Liu 2008;Mehl 2014 andChiţu 2016). It models the choice of reserve currency as:…”

“…Eichengreen and Flandreau (2012) show that financial deepening was a key determinant of the rise of dollar-denominated trade credits in the 1920s. Chiţu, Eichengreen and Mehl (2014) show that financial deepening was the main factor helping the dollar overcome sterling's head start as an international financing currency in the interwar period. Following King and Levine (1993), we measure financial depth by the financial monetisation ratio (broad money to GDP), taking data from Jordà, Schularick and Taylor (2017).…”