Working Paper: NBER ID: w22295
Authors: Emmanuel Farhi; Matteo Maggiori
Abstract: We propose a simple model of the international monetary system. We study the world supply and demand for reserve assets denominated in different currencies under a variety of scenarios: a Hegemon vs. a multipolar world; abundant vs. scarce reserve assets; a gold exchange standard vs. a floating rate system. We rationalize the Triffin dilemma, which posits the fundamental instability of the system, as well as the common prediction regarding the natural and beneficial emergence of a multipolar world, the Nurkse warning that a multipolar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold standard or at the zero lower bound is recessionary. Our analysis is both positive and normative.
Keywords: international monetary system; reserve assets; hegemon; multipolar world; Triffin dilemma
JEL Codes: E12; E42; E43; E44; E52; E61; F02; F31; F32; F33; F34; F36; F38; F42; F44; F53; F55; G11; G12; G15; G18; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reserve asset issuance (G10) | economic stability (E63) |
| balance between supply and demand for reserve assets (F31) | structure of the international monetary system (IMS) (F33) |
| scarcity of reserve assets (F31) | recessionary pressures (E32) |
| hegemon's decisions on reserve asset issuance (F33) | economic instability (E32) |
| hegemon's issuance strategy (D74) | social welfare perspective (I30) |