Working Paper: NBER ID: w31405
Authors: Ryan Chahrour; Rosen Valchev
Abstract: This paper uses a quantitative theory to explore whether escalating geoeconomic conflict and protectionism could threaten the dominant role of the US dollar in the international monetary system. The theory emphasizes the joint determination of countries’ portfolio choices and the currency used for financing international trade, and introduces the Chinese yuan as a potential competitor to the dollar. We find that even a substantial increase in trade tariffs and protectionism would not change the dollar’s dominant role. However, policies directly supporting the yuan’s international use could end the dollar’s dominance if implemented for more than a decade. US economic sanctions on a substantial portion of dollar assets held abroad also pose a threat, but only if maintained for more than 15 years. If competing trading blocs substantively eliminated trade across blocs, a regime with bloc-specific dominant currencies becomes likely.
Keywords: dollar dominance; trade blocs; currency competition; protectionism
JEL Codes: E44; F02; F33; F41; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US trade policy (F13) | dollar's usage in international markets (F31) |
| China's tit-for-tat response (D74) | negate effect of US trade policy on dollar (F69) |
| coordinated protectionist policies (F13) | transition away from global dollar dominance (F69) |
| direct support for the yuan (F31) | end dollar's continued dominance (F01) |
| thresholds crossed (C24) | substantial changes in currency roles (F33) |