Working Paper: NBER ID: w25782
Authors: Pierre-Olivier Gourinchas; Hélène Rey; Maxime Sauzet
Abstract: International currencies fulfill different roles in the world economy with important synergies across those roles. We explore the implications of currency hegemony for the external balance sheet of the United States, the process of international adjustment, and the predictability of the US dollar exchange rate. We emphasize the importance of international monetary spillovers, of the exorbitant privilege, and analyze the emergence of a new ‘Triffin dilemma’.
Keywords: currency hegemony; US dollar; external balance sheet; international adjustment; predictability
JEL Codes: E0; F3; F4; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US dollar's status as the primary international currency (F33) | United States can issue debt more freely than other nations (H63) |
| United States can issue debt more freely than other nations (H63) | stabilizing effect on US external balance sheet (F32) |
| stabilizing effect on US external balance sheet (F32) | US maintains a long position in risky foreign assets while holding short positions in safe dollar liabilities (F32) |
| US maintains a long position in risky foreign assets while holding short positions in safe dollar liabilities (F32) | enables US to run higher external deficits due to excess returns on foreign assets (F32) |
| fluctuations in the dollar exchange rate (F31) | plays a critical role in the external adjustment process (F32) |
| depreciation of the dollar (F31) | improves the US net external asset position (F32) |
| dollar's dominance in trade invoicing and as a vehicle currency (F31) | reinforces its hegemonic status (F54) |
| dollar's hegemonic role (F31) | leads to excess returns on US assets relative to liabilities (G19) |