Working Paper: CEPR ID: DP16722
Authors: Ethan Ilzetzki; Carmen M. Reinhart; Kenneth Rogoff
Abstract: This paper employs an updated algorithm and database for classifying exchange rate and anchor currency choice, to explore the evolution of the global exchange rate system, including parallel rates, capital controls and reserves. In line with a large recent literature, we find that the dollar has become ever-more central as the de facto anchor or reference currencies for much of the world. Our discussion encompasses the history of anchor currency choice, methods for classifying exchange rate regimes, a detailed discussion of the evolution of regimes, the growing substitution of reserves for capital controls as a tool for exchange rate stabilization, the modern Triffin dilemma, and the surprising recent trend decline in volatility of exchange rates at the core of the system. It concludes with issues surrounding the rise of China.
Keywords: exchange rate regimes; international monetary system; capital controls; anchor currencies; exchange rate volatility; triffin dilemma
JEL Codes: E5; F3; F4; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US dollar dominance (F31) | exchange rate stability (F31) |
| US dollar dominance (F31) | accumulation of reserves (E22) |
| US dollar dominance (F31) | use of capital controls (F38) |
| accumulation of reserves (E22) | exchange rate stability (F31) |
| use of capital controls (F38) | exchange rate stability (F31) |
| US dollar dominance (F31) | capital flow dynamics (F32) |
| US dollar dominance (F31) | borrowing costs for countries pegged to the dollar (F34) |
| modern Triffin dilemma (F31) | understanding of dollar's role (F33) |