Privilege Lost? The Rise and Fall of a Dominant Global Currency

Kai Arvai and Nuno Coimbra

Working papers from Banque de France

Abstract: How does a country obtain the status of a safe haven with a dominant global currency? This paper argues that size matters: as a country becomes larger and more diversified, the underlying shock process of the economy becomes less variable. Shocks that can drive a government to default become less likely, implying lower default probability, lower interest rates and higher debt-to-GDP. Furthermore, the larger a country s share in the supply of global safe assets, the more liquid and attractive its bonds are for investors. If the dominant currency country grows less than the rest of the world, its status as a safe haven erodes and interest rate differentials decline. This could explain the recent evidence of shrinking US return differentials on its cross-border bond portfolios.

Keywords: Dominant Currency; Safe Assets; US Dollar; Default (search for similar items in EconPapers)
JEL-codes: E42 F02 F33 N10 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2023
New Economics Papers: this item is included in nep-fdg, nep-ifn, nep-mon, nep-opm and nep-pay
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.banque-france.fr/en/publications-and-s ... nant-global-currency

Related works:
Working Paper: Privilege Lost? The Rise and Fall of a Dominant Global Currency (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:932

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().