Working Paper: NBER ID: w29943
Authors: Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
Abstract: Recent sanctions on the use of Russia’s international reserve assets seem likely to reduce the appeal of US dollar reserves as a “shock absorber” for international payments. But international reserves are also a means to reassure foreign investors that problematic countries will not confiscate their investments. The “collateral” motive for holding dollar reserves has been enhanced by the demonstration that the United States is willing and able to sanction misbehavior. Geopolitically risky countries now more than ever need to reassure foreign investors that their investments are safe from expropriation. We conclude that recent events will strengthen the role of the dollar as the key international reserve currency.
Keywords: US sanctions; dollar dominance; international reserves; foreign investment
JEL Codes: F3; F33; F51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. sanctions on Russia's international reserve assets (F38) | increased demand for dollar reserves from other countries (F31) |
| freezing of Russia's dollar reserves (F31) | increased demand for dollar reserves from other countries (F31) |
| U.S. sanctions on Russia's international reserve assets (F38) | enhanced appeal of dollar reserves as collateral against expropriation (F31) |
| problematic countries seeking to reassure foreign investors (F21) | increased demand for dollar reserves (F31) |