Dominant Currency Debt

Semyon Malamud and Egemen Eren

No 13391, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Why is the dollar the dominant currency for debt contracts and what are its macroeconomic implications? We develop an international general equilibrium model where firms optimally choose the currency composition of their debt. We show that there always exists a dominant currency debt equilibrium, in which all firms borrow in a single dominant currency. It is the currency of the country that effectively pursues aggressive expansionary monetary policy in global downturns, lowering real debt burdens of firms. We show that the dollar empirically fits this description, despite its short term safe haven properties. We provide further modern and historical empirical support for our mechanism across time and currencies. We use our model to study how the optimal monetary policy differs if the Federal Reserve reacts to global versus domestic conditions.

Keywords: Dollar debt; Dominant currency; Exchange rates; inflation (search for similar items in EconPapers)
JEL-codes: E44 E52 F33 F34 F41 F42 F44 G01 G15 G32 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Dominant currency debt (2019)
Working Paper: Dominant Currency Debt (2018)
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