Working Paper: NBER ID: w18097
Authors: Livia Chitu; Barry Eichengreen; Arnaud J. Mehl
Abstract: This 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.
Keywords: international currency; dollar; sterling; bond markets; financial development
JEL Codes: F30; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial market development (O16) | Dollar's rise as leading international currency (F31) |
| Dollar's rise as leading international currency (F31) | Overtaking sterling as leading international currency (F33) |
| Sterling's incumbency advantage (D79) | Delay in dollar overtaking sterling (F31) |
| Financial deepening in the U.S. (F65) | Dollar's rise as leading international currency (F31) |
| Economic stagnation in the UK (N14) | Decline of sterling (F36) |
| Decline of UK's relative economic size (N14) | Decline of sterling (F36) |